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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


Emergency Fund


Mortgage Fund


Notes and Loans Payable


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






(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






Less Capital Assets



Life Insurance















Surplus or (Deficit)



Basic Finance, Finance

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

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