a. Jasmine, age 42, is a single parent with an eight-year-old daughter. She earns $600,000 annually as a marketing manager in a software house. As part of her remuneration package, Jasmine’s employer also provides her with a group life insurance protection in the amount of $1,000,000.

Jasmine has decided to purchase additional life insurance so that her daughter will be financially protected if she suffers from premature death.

Currently, Jasmine has the following financial needs for her family if she should die:

Income support for her daughter -.................................$23,000 monthly
Establish an education fund for her daughter - ............$2,200,000
Pay off mortgage loan on home -....................................$2,500,000
Pay off credit card debts -.....................................................$70,000
Pay off auto loan --...............................................................$100,000
Pay off funeral costs and other final expenses -............$150,000

Jasmine does not have much cash savings but she owns several mutual funds and blue chips shares with a current market value of $1,500,000. Also, she has bought an individual life insurance policy for herself with a sum insured of $2,000,000. Further, Jasmine has participated in her employer’s retirement scheme with an account balance of $500,000.

1. Based on the ‘needs approach’, how much additional life insurance should Jasmine purchase to fulfill her financial goals. It is assumed that the rate of return earned on the policy proceeds is equal to the rate of inflation and social security benefits are not available for Jasmine’s daughter.

2. In the above question a(i), how much additional life insurance should Jasmine purchase if social security benefits in the amount of $7,000 monthly are payable until her daughter attains age 18? 

3. Examine the usefulness of the ‘needs approach’ as a method of determining the amount of life insurance to purchase. 

4. Explain how the level-premium method can provide the insured with lifetime protection.

Answer rating: 100% (QA)

The needs approach for determining the amount of life insurance needed has a different goal than the earnings multiple approach The goal of the needs ... View the full answer