Life Insurance Needs Illustration

1
Life Insurance Needs Illustration

• RMI 3500
• Intro. to Risk Mang. Ins.
• Robert Klein

Revised 10/14/07
2
Family Circumstances

• Jim and Sarah are married and have daughter, age
  3.
• Sarah, age 30, earns 30,000 annually from her
  job.
• Tim, age 40, earns 35,000 annually from his job.
• Assume that Jim will die before Sarah.
• The family wants to ensure that they have
  adequate life insurance on Jim to cover their
  cash and income needs if Jim dies.
• Hence, they want to determine how much additional
  life insurance they should purchase on Jim to
  cover these needs.

3
Key Assumptions

• Jim dies immediately.
• Sarah continues to work if Jim dies.
• OASDI survivor benefits are only payable to the
  daughter until she is age 18.
• The life insurance proceeds are invested at an
  interest rate equal to the rate of inflation.

4
Additional Cash Needs

• Cash Needs
• estate clearance 20,000
• mortgage redemption 150,000
• emergency fund 20,000
• educational fund 80,000
• Total 270,000
• Present Insurance and Financial Assets
• group life insurance 100,000
• investments/savings 20,000
• Total 120,000
• Additional life insurance (for cash needs)
• 270,000 - 120,000 150,000

5
Income Needs/Income Sources

• Income Needs
• readjustment period 3,500 monthly for 2 years
• dependency period 3,500 monthly for 13 years
• blackout period 2,500 monthly for 15 years
• Sarahs retirement period 2,000 monthly for 20
  years
• Expected Income - Sources Other than Life
  Insurance
• readjustment period 2,000 monthly for 2 years
• dependency period 2,000 monthly for 13 years
• blackout period 2,000 monthly for 15 years
• Sarahs retirement period 1,000 monthly for 20
  years

6
Figuring Additional Income Needs

• Readjustment Period
• 3,500 (needs) - 2,000 (inc) x12 x2 36,000
• Dependency Period
• 3,500 (needs) - 2,000 (inc) x12 x13 234,000
• Blackout Period
• 2,500 (needs) - 2,000 (inc) x12 x15 90,000
• Retirement Period
• 2,000 (needs) - 1,000 (inc) x12 x20 240,000
• Total Income Gap 600,000

7
Total Additional Life Insurance Needed

• Cash Needs 150,000
• Income Needs 600,000
• Total Needs 750,000