Larry Terry recently hired you to help him determine the appropriate amount of life insurance he should
Question:
Larry Terry recently hired you to help him determine the appropriate amount of life insurance he should carry. Use the information provided below to calculate Larry's additional life insurance need.
Larry is 38 and married to Mary, age 35. The couple has one child, Gary, who is 6. Larry and Mary currently budget for annual living expenses of $60,000, but if Larry were to die, he expects that his wife would collect $12,000 in annual Social Security survivorship income to supplement her projected annual income of $30,000. That leaves $18,000 in after-tax income needs to be replaced annually. Larry wants his insurance proceeds to provide income for Mary until she reaches her planned retirement age of 65, at which time her retirement benefits will begin. Assume an annual growth rate in potential insurance proceeds of 6 percent with 3 percent inflation.
Larry would like to ensure that his insurance proceeds will cover expected funeral costs of $6,000 and estate administration expenses of $5,000. He also wants his wife to be able to completely pay off their $180,000 mortgage and the $12,000 they owe on their cars. Finally, he would like to leave enough funds to pay for four years of college for Gary at an estimated annual cost in today's dollars of $20,000. (Assume a growth rate of 5 percent for the education fund and a 5 percent education inflation rate.) He does not anticipate any other special needs and does not expect to owe any estate taxes.
If Larry has an existing term life insurance policy with a $250,000 death benefit, as well as $65,000 in retirement funds and $10,000 in a savings account, how much additional life insurance should he purchase?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill