GB31303

Chapter 10

2. You and your spouse are in good health and have reasonably secure careers.
Each of you makes about $40,000 annually. You own a home with an $80,000
mortgage, and you owe $15,000 on car loans, $5,000 on personal debts, and
$4,000 on credit card loans. You have no other debt. You have no plans to
increase the size of your family in the near future. Estimate your total insurance
needs using the DINK method. (LO10.1)

Insurance need (DINK) = ½ debts + funeral costs

One half of mortgage = $40,000
One half of car loan = 7,500
One half of personal debts = 2,500
One half of credit card loans = 2,000
Funeral expenses (estimated) = 10,000

Total insurance needs = $62,000

(estimated)

3. Shaan and Anita are married and have two children, ages 4 and 7. Anita is a
“nonworking” spouse who devotes all of her time to household activities.
Estimate how much life insurance Shaan and Anita should carry. (LO10.1)
To estimate how much insurance Shaan and Anita should carry, multiply the
number of years before their youngest child, 4, reaches 18 by $10,000.
Insurance needed = 14 × $10,000 or $140,000.

7. Mark and Parveen are the parents of three young children. Mark is a store
manager in a local supermarket. His gross salary is $75,000 per year. Parveen
is a full time stay-at-home mom. Use the easy method to estimate the family's
life insurance needs. (LO10.1)
Current income × 7 years = $75,000 × 7 = $525,000 × .70 = $367,500

8. You are a dual income, childless family. You and your spouse have the following
debts (total): mortgage, $200,000; auto loan, $10,000; credit card balance,
$4,000; and other debts of $10,000. Further, you estimate that your funeral will
cost $8,000. Your spouse expects to continue to work after your death. Using
the DINK method, what should be your need for life insurance? (LO10.1)
 Insurance need (DINK) = ½ debts + funeral costs
One-half of the mortgage = $100,000
One-half of auto loan = 5,000
One-half credit card balance = 2,000
One-half other debts = 5,000
Funeral expenses = 8,000
Total need for life insurance = $120,000

12. Sophia purchased a variable annuity contract with a $25,000 purchase payment.
Surrender charges being with 7 percent in the first year, and decline by 1 percent
each year. In addition, Sophia can withdraw 10 percent of her contract value
each year without paying surrender charges. In the first year, Sophia needed to
withdraw $6,000. Assume that the contract value had not increased or
decreased because of investment performance. What was the surrender charge
Sophia had to pay? (LO10.4)

Sophia can withdraw 10 percent of the contract value or $2,500. Since she
withdrew $6,000, Sophia must pay 7 percent for $3,500 ($6,000 - $2,500) or
$3,500 × .07 = $245.