Inflation is expected to be 3% annually. Their salaries should increase 5% annually. They are not subject
Question:
Inflation is expected to be 3% annually.
•Their salaries should increase 5% annually.
They are not subject to a state income tax.
The after-tax investment rate of return is 6%.
• Bank lending rates are as follows: 3.5% for a 15-year mortgage, 4.5% for a 30-year mortgage, and 6% for a secured personal loan.
Insurance Information.
Nicholas makes $39,000 Salary per year
Policy A | Policy B | Policy C | |
Insured | Nicholas | Nicholas | Whitney |
Face amount | $250,000 | $117,000 | $30,000 |
Policy Type | Whole Life | Group Term | Group Term |
Cash Value | $2,000 | $0 | $0 |
Annual Premium | $2,100 | $267 | $75 |
Premium Payor | Trustee | Employer | Employer |
Beneficiary | Trust | Kelly | Nicholas |
Policyowner | Trust | Nicholas | Whitney |
Using a human life value approach net of federal and state income taxes, how much additional life insurance is needed on Nicholas's life?
Two things: first you need to find the FV of his lifetime earnings. Use his annual salary increases for i. Then, once you have that FV, discount that to the PV. Second thing: only subtract Nicholas' current insurance, not Whitney.
Hint: Human life approach is what they are losing in total money by him not working any longer. First we figure out what that total amount would be at the end of his working life and then we figure out what the present value is of that amount.
1) Figure out the income he will earn after taxes using the assumption found in the case. The case assumes taxes are 12%.
2) Calculate the total value (FV) of Nicholas working over his remaining life expectancy. Use his expected annual increase in salary as the interest rate.
3) Calculate the PV needed today to get to that FV. Use inflation rate as your interest rate.
4) Compare the insurance needed to what they have today to determine the shortfall and round to 50,000.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill