Sue and Tom Wright are assistant professors at the local university. They each take home about $40,000 per year after taxes. Suye is 37 years of age, and tome is 35. Their two children,Mike and Karen are 13 and 11.

Were either one to die, they estimate that the remaining family members would need about 75% of the present combined tak home pay to retain their current standard of living while the children are still dependent. This does not include an extra $50/month in child-care expenses that would be required in a sigle-parent household. They estimate that surviviors' benefits would total about $1,000 per month in child support.

Both Tom and Sue are knowledeable investors. In the past, average after-tax returns on their investment portfolio have exceeded the rate of inflation by about 3%.

1. If Sue Wright was to die today, how much would the Wrights need in the family maintenance fund? Use the "needs approach" and Explain the reasons behind your calculation.

2. Suppose the Wrights found that both Tome and Sue had a life insurance protection gap of $50,000. Present the steps in sequence how Wrights should proceed to search for protection to close that gap?

4 answers

$64,228.24
1.[(40000+4000)/75%]+(50*12) 2.40000-(1000*12)3.52000-60600 4.8600*(rate*#yrs+1).There it is. All you have to do is compute the real return rate for the years off the chart. This problem is an annuity problem. We learned it in week one!
Sue and Tom Wright are assistant professors what there insurance gap
FAMILY MAINTENANCE FUND

Monthly survivors' expenses $5650
Monthly survivors' take-home pay $3500
Monthly survivors' benefits $1200
Total contribution by survivors' ($4700)
Monthly maintenance requirement $950
x12
Annual maintenance requirement $11,400
Multiply by annuity factor
Term of Fund (years) 7
Annual Real Return 3%
Annual Factor 7.6625
Family maintenance fund $87,352.50
Sorry that was not the right numbers, but the right set up. Let me do it with your numbers. the combined income is $80,000 x .75=60,000/12=5000, add the 50 for childcare and get 5050 for monthly survivors expense.
Take home pay of survivor- divide 40,000 by 12=3333.33 + survivors benefits = 1000 add to take home pay = 4333.33 take that away from the monthly expenses of 5050 = 716.67 x 12 = 8600.04. Then you have 7 yrs at 3% = and annuity factor of 7.6625 x 8600.04 = 65897.81 for the family maintenance fund. And then set it up like above. Hope this helps