Question

Joetta Hernandez is a single parent with two children and earns ​$58400 a year. Her​ employer's group life insurance policy would pay 2.5 times her salary. She also has ​$77867 saved in a​ 401(k) plan, ​$6489 in mutual​ funds, and a ​$3893 certificate of deposit. She wants to purchase term life insurance for 15​ years, until her youngest child is​ self-supporting. She is not concerned about her outstanding​ mortgage, as the children would live with her sister in the event of​ Joetta's death. Assuming she can receive a 3 percent​ after-tax, after-inflation return on insurance​ proceeds, use the earnings multiple method to calculate her insurance need. How much more insurance does Joetta need to​ buy? What other information would you need to know to use the needs approach to calculate​ Joetta's insurance​ coverage?

Answer 1

Current earnings = 58400/year

with 3% returns, she needs to leave a sum of 58400/0.003 = 19466666 to her children

Her other savings =  2.5 times salary + ​$77867 saved in a​ 401(k) plan + $6489 in mutual​ funds + ​$3893 certificate of deposit = 205049

We need to know what return can be availed on this fund

Assuming return on this sum is also 3% after tax and after inflation,

She needs an insurance cover of 19466666-205049 = $19261617