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Computation of amount of insurance using needs approach and Capital Retention approach
Needs Analysis
Using the following information make an estimate of the amount of insurance to be carried using the "Needs Approach" and the Capital Retention Approach." Assume a pretax interest rate of 6%, a tax rate of 30%, no inflation and that Mr. Greenleaf's earnings will remain constant.
Current cash needs:
Final expenses
$15,000
Emergency Fund
$20,000
Mortgage Fund
$207,000
Notes and Loans Payable
$42,500
Educational Expenses (NPV)*
Charles (age 18) $
Tiffany (age 14) $
Mark (age 8) $
Total Educational Expenses
*The college expenses are estimated at $20,000 a year for four years for each child. The easiest way to estimate the present value of this total of $240,000 is to compute the present value of $20,000 payable over the four years for Charles, age 18 this will be the amount that he needs now. Then discount a similar sum an additional four years for Tiffany, age 14, and an additional ten years for Mark, age 8.
Total Current Cash Needs:
$
Plus Capital Needs:
Needs Approach
Capital Retention
For Spouses income:
(Use 60% of joint income)
$9200 monthly for 42.5 years
(Her life expectancy is 84.5)
After Tax interest Rate___%
Use a 30% Tax Rate
Less: The Present Value
Wife's wages of $3,917
Monthly to age 66
(Use the after tax interest rate
Social Security Payments
Survivor's benefits to Mark's age 18.
$1600 monthly
(Use the pretax interest rate)
Retirement income at Wife's age 66
$650
(Use the after tax interest rate)
Wife employer pension
$1300 monthly at age 66
(Use after tax interest rate)
Total Capital requirements
Total Capital Requirements
And Current cash needs
Total
Less Capital Assets
Life Insurance
$210,000
Cash
Investments
$134,000
Other
$61,000
$420,000
Surplus or (Deficit)
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