Computation of amount of insurance using needs approach and Capital Retention approach
Needs Analysis
Using the following information make an estimate of the amount of insurance to be carried using the "Needs Approach" and the Capital Retention Approach." Assume a pretax interest rate of 6%, a tax rate of 30%, no inflation and that Mr. Greenleaf's earnings will remain constant.
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Current cash needs:
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Final expenses
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$15,000
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Emergency Fund
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$20,000
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Mortgage Fund
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$207,000
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Notes and Loans Payable
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$42,500
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Educational Expenses (NPV)*
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Charles (age 18) $
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Tiffany (age 14) $
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Mark (age 8) $
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Total Educational Expenses
*The college expenses are estimated at $20,000 a year for four years for each child. The easiest way to estimate the present value of this total of $240,000 is to compute the present value of $20,000 payable over the four years for Charles, age 18 this will be the amount that he needs now. Then discount a similar sum an additional four years for Tiffany, age 14, and an additional ten years for Mark, age 8.
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Total Current Cash Needs:
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$
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$
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Plus Capital Needs:
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Needs Approach
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Capital Retention
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For Spouses income:
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(Use 60% of joint income)
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$9200 monthly for 42.5 years
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(Her life expectancy is 84.5)
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After Tax interest Rate___%
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Use a 30% Tax Rate
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$
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$
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Less: The Present Value
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Wife's wages of $3,917
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Monthly to age 66
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(Use the after tax interest rate
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Social Security Payments
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Survivor's benefits to Mark's age 18.
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$1600 monthly
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$
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$
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(Use the pretax interest rate)
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Retirement income at Wife's age 66
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$650
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$
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$
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(Use the after tax interest rate)
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Wife employer pension
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$1300 monthly at age 66
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(Use after tax interest rate)
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Total Capital requirements
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$
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$
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Total Capital Requirements
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$
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$
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And Current cash needs
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Total
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Less Capital Assets
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Life Insurance
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$210,000
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Cash
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$15,000
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Investments
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$134,000
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Other
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$61,000
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Total
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$420,000
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$420,000
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Surplus or (Deficit)
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$
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$
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