Reference no: EM133004526

Stan and Siri Sanchez, both aged 35, have three small children. Sally age 10, Steven age 8, andSavannah, age 3. The Sanchez' want to ensure that they have adequate resources in place to complete their estate plans, should Stan pass away prematurely.Considering their current resources and expressed needs as noted below, what is an appropriate amount of life insurance they should consider?

Pay final expenses of $22,000

Repay credit card debt of $8,000

Repay mortgage on the family home of $250,000

Repay car loan of $7,000

Establish an educational fund of $60,000 for the children

Charitable bequest of $15,000Current Resources / Assets

Cash in savings account of $9,000.

Group insurance on Stan's life of $75,000

Spousal group insurance on Siri's life of $40,000

If Stan dies, Siri will start to work as a teacher and will earn $55,000 per year. She will participate in the teacher's pension plan until age 60, at which time her retirement pension willbe approximately $24,000 per year.

They want to maintain the family income at $75,000 per year while the children are minors, then$60,000 until Siri's retirement at age 60, and $55,000 thereafter. They are assuming Siri will live to age 90. For planning purposes, they have chosen to disregard any provisions for governmentsponsored benefits arising from a premature death, and any tax deductions for Siri.

Note: To simplify the capital needs analysis, ignore inflation and assume a 4% rate of return canbe earned on any monies invested to generate income.

Assume that Stan has just died. Taking into considering the Sanchez' current resources andexpressed needs, answer each of the following questions and show your calculations, where appropriate.

Problem 1. What is the immediate net cash position after paying final expenses?

Problem 2. If they were to also repay their debts and cover other lump-sum needs, how much additional liquid cash would be required?

Problem 3. With respect to their long-term income needs, what is the annual income shortfall in each of the periods identified?

Problem 4. It has been determined that on average there will be a shortfall of $2,300 per month inongoing income to meet all the long-term income needs. They do not want to use up any capital, only the earnings on that capital, to cover the shortfall. How much capital would berequired to cover this shortfall, if they could get an investment return of 4% per year on that capital?

Problem 5. Using the information from questions 1, 2 and 4, what is the additional amount ofinsurance on Stan's life that would be required to meet the family's objectives?

Problem 6. What type of insurance and in what amounts would you recommend? Provide an explanationto justify each of your recommendations.