Will, age thirty-three, and Erin, age thirty-one, are a newly married couple. Will is an assistant manager at a national electronics chain store and earns $24,000 a year. Erin is a web application developer earning $53,000 annual. They own a condominium valued at $285,000, which has an outstanding mortgage of $231,000. They have two vehicles and $34000 in car loans, as well as combined outstanding college loans of $126,000. They also have $12,000 in credit card debt, arising mostly from their recent wedding and honeymoon expenses.

Will's employer does not offer any retirement savings plan or other benefits, and, because of his and Erin's current debt, Will is unable to put any savings into a retirement account. Erin has been with the same employer for six years and has been contributing to a 401(k) for five years. Her employer does not provide any matching contributions for the employer-sponsored defined contribution plan. The current value of Erin's 401(k) is $17,000, including investment returns. Erin's employer provides group universal life (GUL) coverage for her in the amount of $50,000. The couple has no personal savings, and any excess money goes to paying down their outstanding debts.

Will and Erin have been considering whether to purchase life insurance, although they are concerned about the costs. They have decided to consult with a local agent to learn more about life insurance products and what their current life insurance needs would be. The agent advises the couple that she will be using the needs approach to evaluate their current financial situation, economic needs, and available resources to meet expenses in the event of their premature death. In this exercise we will concentrate on the life insurance the couple should purchase on Erin's life. She will do a separate analysis to suggest the amount for life insurance on Will's life that she will present later in her visit..

The first step in this process is to determine the couple's cash needs in the event of either Will's or Erin's premature death.

Final Expense Needs

Funeral costs $ 8,000

Estate settlement 5,000

Federal taxes 0

State taxes 0

Total final expenses $ 13,000

Debt Elimination Needs

Satisfy outstanding mortgage(s) $ 231,000

Eliminate outstanding credit card debt 12,000

Eliminate college loans 126,000

Eliminate outstanding car loans 34,000

Total debt elimination needs $ 403,000

Family's Living Expenses Needs

Household maintenance expenses $ 82,000

Other living expenses 125,000

Total living expenses needs 207,000

Total Expense Needs $ 623,000

Based on a review of the couple's current financial situation, the agent determines total expense needs of $623,000. The agent further decides to include an emergency fund in the amount of $15,000 to cover any unanticipated expenses that Will may face following Erin's premature death. Although the couple is still relatively young and early in their working careers, the agent will also include an amount for future retirement income funding. The calculation for the amount of retirement income would be based on age, Erin's employer-sponsored retirement plan, and available Social Security benefits at retirement age. In this case, the agent will use an amount of $250,000 for Will's retirement.

The only assets that the couple currently has available are Erin's $50,000 GUL and her $17,000 retirement account, for which Will is listed as the beneficiary. Neither individual would receive survivor's benefits from Social Security until they reach retirement age. Future life insurance reviews may reflect such benefits as the couple's financial and family situation changes over time.

1. Calculate the total life insurance needs for Will.

1. Describe how the agent's calculation would have differed if she had used a human value approach in her estimate of Erin's life insurance needs. What amounts will this calculation use and how will these amounts be manipulated?