Megan and Nick Doherty are 40 years old and have one son, age 10. Megan is the
Question:
Megan and Nick Doherty are 40 years old and have one son, age 10. Megan is the primary earner, making $65,000 per year. Nick does not currently work. The Dohertys have decided to use the needs analysis method to calculate the value of a life insurance policy that would provide for Nick and their son in the event of Megan’s death.
Megan and Nick estimate that while their son is still living at home, monthly living expenses for Nick and their child will be about $2,900 (in current dollars). After their son leaves for college in 4 years, Nick will need a monthly income of $2,750 until he retires at age 65. The Dohertys estimate Nick’s living expenses after 65 will only be $2,300 a month. The life expectancy of a man Nick’s age is 82 years, so the Doherty family calculates that Nick will spend about 17 years in retirement.
Using this information, complete the first portion of the needs analysis worksheet to estimate their total living expenses.
Life Insurance Needs Analysis Worksheet
Name of insured | Nick and Megan Doherty | Date | July 31, 2015 | ||
Step 1: Financial resources needed after death | |||||
1. Annual living expenses and other needs | |||||
Period 1 | Period 2 | Period 3 | |||
a. | Monthly living expenses | $3,300 | |||
b. | Net yearly income needed (1a x 12) | ||||
c. | Number of years in time period | 4 | 9 | 17 | |
d. | Total living needs per time period (1b x 1c) | ||||
Total living expenses (add Line 1d for each period to check your total): | $924,600 |
In addition to these monthly expenses, other future outlays must be accounted for. Before they had a child, Nick worked as a real estate agent, but his knowledge and skills are now somewhat outdated. Therefore, they include $25,000 for Nick to go back to school. Additionally, Megan and Nick want to create a college fund of $30,000 to fund their child’s college education. They estimate that final expenses (funeral costs and estate taxes) will amount to $12,000. Finally, they have taken out a loan for a business venture of $32,200 and a credit card balance of $1,200. Because the Dohertys are renters, they have no outstanding mortgage.
Using this information, complete the next portion of Step 1 to determine the total financial resources needed.
2. Special needs | ||
a. | Spouse’s education fund | |
b. | Child’s college fund | |
c. | Other needs | $0 |
3. | Final expenses (funeral costs and estate taxes) | |
4. | Debt liquidation | |
a. | House mortgage | |
b. | Other loans | |
c. | Total debt (4a + 4b) | |
5. | Other financial needs | $0 |
Total financial resources needed (add right-hand column plus the Total Living Expenses you calculated): |
The second half of the needs analysis worksheet is not shown on this page. To complete the worksheet and determine the value of the life insurance policy the Dohertys should purchase, they need to factor in additional information.
True or False: Megan’s future salary (if she does not die) should be accounted for in the remaining portion of the form.
South Western Federal Taxation 2015
ISBN: 9781305310810
38th edition
Authors: William H. Hoffman, William A. Raabe, David M. Maloney, James C. Young