Sue and Tom Wright are assistant professors at the local university. They each take home about $40,000 per year after taxes. Sue is 37 years of age, and Tom is 35. Their two children, Mike and Karen, are 13 and 11.
Were either one to die, they estimate that the remaining family members would need about 75% of the present combined take-home pay to retain their current standard of living while the children are still dependent. This does not include an extra $50/month in child-care expenses that would be required in a single-parent household. They estimate that survivors' benefits would total about $1,000 per month in child support.
Both Tom and Sue are knowledgeable investors. In the past, average after-tax returns on their investment portfolio have exceeded the rate of inflation by about 3%.
If Sue Wright was to die today, how much would the Wrights need in the family maintenance fund? Use the "needs approach" and explain the reasons behind your calculations.
Suppose the Wrights found that both Tom and Sue had a life insurance protection gap of $50,000. Present the steps in sequence how Wrights should proceed to search for protection to close that gap?
SHOW ALL WORK FOR EACH ASSIGNMENT AND EXPLAIN EACH STEP CAREFULLY.
1)For the time being when both are alive, they take home a combined pay of ($40,000 + $40,000) $80,000.
2)If any of them dies, the remaining family members would need 75% of the $80,000 which is equal to ($80,000 × 75%) $60,000
3)Now, if one of them dies, the actual take home pay of the person who died would be lost which is $40,000and since the family needs $60,000 out of which $40,000 are covered (the take home pay of the living person), then the gap would be ($60,000 - $40,000) $20,000.
4)The family will get $,1000 per month in child support – that is $12,000 per year, so now the gap would be ($20,000 - $12,000) $8,000
5)After the death of one of them, the child-care expenses that would be required in a single-parent household would be $50 per month or $600 per year, so now the total gap that needs to be covered would be ($8,000 + $600) $8,600
6)From the above we can see that the total needs -75% of the current take home pay is $60,000; add to this amount the $600 (extra $50/month in child-care expenses that would be required in a single-parent household), therefore the total needs are $60,600. $12,000 of those would be covered by the (survivors' benefits would total about $1,000 per month in child support); therefore the total needs = $60,600 - $12,000 = $48,600