Unit 3 Personal Finance

Running Head : UNIT 3 , PERSONAL FINANCE

Unit 3 , Personal Finance

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Unit 3 , Personal Finance

The needs approach is a method that calculates the required life insurance needed by an individual or family to cover their needs . It basically answers how much will be needed to meet obligations at the time of death as well as the needed future income by the survivors to keep up the household

In the case of

the Wright family , their to 48 ,600 . This value was determined by : 1 ) calculating seventy-five percent of the present combined take-home pay of Sue and Tom Wright which is 80 ,000 per year 2 ) subtracting the take-home pay of the surviving spouse (Tom , which is 40 ,000 , to determine the income gap 3 ) adding the 600 annual child care expenses to the income gap then subtracting the annual child support benefit of 12 ,000 to the expenses to get the net gap and , 5 ) adding to the net gap the take-home pay of Tom Wright . Thus

75 of 80 ,000 60 ,000 - 40 ,000 20 ,000 income gap 20 ,000 600 - 12 ,000 8 ,600 net gap 40 ,000 8 ,600 48 ,600 The 48 ,600 would represent a stream of cash flows of which the present value is the amount that needs to be in the Family Maintenance Fund . The inflation rate is 3 , used as r and the number of year as t in the formula for present value interest factor (PVIF

Year (t ) 1 2 3 4 5 6 7

Amount 48 ,600 48 ,600 48 ,600 48 ,600 48 ,600 48 ,600 48 ,600

Present Value Interest Factor 0 .97 0 .94 0 .92 0 .89 0 .86 0 .84 0 .81

Present Value 47 ,184 .47 45 ,810 .16 44 ,475 .88 43 ,180 .47 41 ,922 .79 40 ,701 .73 39 ,516 .25

A Life Insurance Protection Gap of 50 ,000 means that they have an insurance for 252 ,791 .75 302 ,791 .75 - 50 ,000 . This gap could be closed by any of the following

1 ) They can contact insurance companies for an affordable term life insurance . Once they fill out a form , they would be provided a rate information from insurance agents . Insurance agents usually come from a large number of life insurance firms and they can give their client contact information for many companies where the client has the freedom to choose the rate he likes better

2 ) By going to the website www .insurance4usa .com . The website will give the client different rates to choose from

3 ) By setting an appointment with their investment banker . An investment banker can help his client close the gap by presenting a variety of investment options as well as the pros and cons of each investment option . The client has the opportunity to choose which investment option he thinks will be suited for his family References

Needs...