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Using the given information make an estimate of the amount of insurance to be carried using the 'Needs Approach' & the Capital Retention Approach."  Suppose a pretax interest rate of 6 percent, a tax rate of 30percent, no inflation and that Mr. Greenleaf's earnings will remain constant.

Current cash needs:

Final expenses

$15,000

Emergency Fund

$20,000

Mortgage Fund

$207,000

Notes and Loans Payable

$42,500

Educational Expenses (NPV)*

Charles (age 18) $

 

Tiffany (age 14) $

 

Mark (age 8) $

 

 Total Educational Expenses

The college expenses are estimated at 20,000dollar a year for four years for each child.  The easiest way to estimate the present value of this total of 240,000 dollar 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.

Total Current Cash Needs:

$

$

Plus Capital Needs:

Needs Approach

Capital Retention

For Spouses income:

 

 

(Use 60% of joint income)

 

 

$9200 monthly for 42.5 years

 

 

(Her life expectancy is 84.5)

 

 

After Tax interest Rate___%

 

 

Use a 30% Tax Rate

$

$

Less: The Present Value

Wife's wages of $3,917

 

 

Monthly to age 66

 

 

(Use the after tax interest rate

 

 

Social Security Payments

 

 

Survivor's benefits to Mark's age 18.

 

 

$1600 monthly

$

$

(Use the pretax interest rate)

 

 

Retirement income at Wife's age 66

 

 

$650

$

$

(Use the after tax interest rate)

 

 

Wife employer pension

 

 

$1300 monthly at age 66

 

 

(Use after tax interest rate)

 

 

Total Capital requirements

$

$

Total Capital Requirements

$

$

And Current cash needs

 

 

Total

 

 

Less Capital Assets

 

 

Life Insurance

$210,000

 

Cash

$15,000

 

Investments

$134,000

 

Other

$61,000

 

Total

$420,000

$420,000

Surplus or (Deficit)

$

$

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M917177

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