Sue and Tom Wright are assistant professors at the local university. They each take home about $40,000 per year after taxes. Sue is 37 years of age, and Tom 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 take-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 single-parent household. They estimate that survivors' benefits would total about $1,000 per month in child support.
Both Tom and Sue are knowledgeable investors. In the past, average after-tax returns on their investment portfolio have exceeded the rate of inflation by about 3%. Answer the two questions.
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 calculations.
2. Suppose the Wrights found that both Tom 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?
The solution uses the needs approach as well as calculations for life insurance gap to answer the questions for the Tom and Sue case study.