Life insurance can serve many purposes. For example, it can replace lost income, pay for funeral expenses, retire large debts, or pay for children’s college expenses. It can also be used as a vehicle for savings. How you use life insurance will depend upon your life’s circumstances. The amount of life insurance coverage you need will also be unique to your specific situation. It is important for you to learn early what type of coverage you’ll need and how much will be enough. Learning how to do this now will help you make changes when needed and be prepared for the future.
Consider your situation in life. Are you someone’s dependent? Do you provide the primary source of income for your family? If you were to come to an untimely end would you leave someone in need? How will your funeral expenses be covered? Will those who survive you have a source of income while they recover from losing you? If you are the primary caregiver, will funds be needed to pay for child care? Will funds need to be available to replace the primary income earner should he or she need to take care of the children in your absence? There are many factors to consider. This assignment will help you develop a plan that addresses these factors to determine how much life insurance coverage you’ll need.
Because each student in the class will have varying life circumstances, you will need to determine how much life insurance coverage will be needed in the following scenario:
David is 35 years old and works for a regional airline. His wife, Margaret, is 33 years old and runs a small business from home. She also cares for their twin boys, Tommy and William, both 6 years old. Her business requires her to be away from home two days a week, and a nanny provides child care during that time. They anticipate the twins leaving home at age 18 and going to college. David and Margaret both plan on retiring at age 65. The life expectancy for David is 82 years. The life expectancy for Margaret is 85 years.
Income David will make an average of $48,000 a year until the boys enter college, at which point his pay will be an average of $56,000 a year. His retirement pay is anticipated to be $30,000 a year. This retirement pay will not be paid to Margaret should David die before his retirement. Margaret will make an average of $34,000 a year until her retirement; she has no plans to expand the business when the boys enter college. She has a retirement fund that is planned to produce $15,000 each year of retirement. David and Margaret do not anticipate receiving any Social Security benefits at any point during their life, either before or after retirement.
Savings, Investments, and Other Insurance David and Margaret currently have $37,000 saved in a mutual fund. David has an employee-provided life insurance benefit of $50,000. Margaret is also covered by this benefit in the amount of $25,000.
Living expenses If Margaret or David were to suffer an untimely death, they anticipate their living expenses for the two boys and the surviving spouse to be $4100 a month. (This amount includes childcare for the boys). Once the boys leave for college, living expenses are anticipated to be $3200 a month until retirement, at which time they will drop to $2700 a month.
Education and other needs Both David and Margaret have completed their education. Margaret and David would like to have $100,000 in a college fund for the boys. They have a 4-bedroom home with a $160,000 mortgage and no other debts.
Final expenses Funeral expenses are estimated to be $18,000 in the area in which David and Margaret live.
Assumptions The living expenses during retirement are anticipated to drop because the mortgage will be paid in full by the time retirement begins. The incomes shown in this scenario are after-tax, so taxes do not need to be calculated as an additional expense.
Complete this assignment by calculating the amount of life insurance coverage that should be obtained on David. (In other words, assume Margaret is the surviving spouse). Use the information above and this worksheet to complete the life insurance needs analysis. Then answer the essay question found on the worksheet.
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