1.)Theresa Cortez is the primary breadwinner for a family of hour.Her husband has been unable to work since the onset of severe vertigo 2 ½ years ago.Their two children are both in high school and,presumably,college bound.After attending your seminar about life insurance planning, she has come to you to determine weather she has enough life insurance. Besides the small disability check that her husband receives, she is the only source of income, albeit a good income of $ 84,000 per year. At your request she has brought her most recent annual income and expense statement that shows the family’s annual expense of $ 55,000
annual taxes of $ 17,000,
and savings of $ 12,000.
Calculate Therese’s current insurance need using the Human Life value approach for each of the following four scenarios assuming working life is 26 years and projected discount rate of 8.0% before taxes compounded daily.
a.)Using her gross income
b.)Using her gross income and growth rate of 3.5%
c.)using her net income
d.)using her net income and growth rate of 3.5%
Which of these four methods would result in the most reasonable estimation of insurance need?
2.) John Wilson is a 42 year old computer programmer, husband and father of four. He wants to use the capital retention approach to determine how much life insurance he should purchase. Because of his $ 105,000 salary and their four children, his wife does not work outside the home. The family’s current annual expenses are approximately $75,000,including $8,000 in annual IRA contributions. He prefers to use the capital retention approach(CRA) so that he can be reasonably assured that his family will not exhaust the proceeds of his policy.However,he,also wants to consider the possible reduction in expenses and apply a 70% replacement ratio to, the calculation.
a.)calculate john’s insurance need using the capital retention approach, an after tax discount rate of 5.5% and assume end of period payment of benefits.
b.) Calculate John’s insurance need using the human life value approach(HLV) an after tax discount rate of 5.5% a remaining working life of 25 years and assume end of period payment of benefits.
After your presentation, John was bewildered about why the HLV and CRA calculations resulted in significantly different insurance needs. Using the two formulas as a guide explain to John why this result occurred.
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