Scribd Logo
Upload

Welcome to Scribd!

  • 9 views

    Lec 8 - Example Answers

    Uploaded by

    Encik Hazreen
    This document provides an example of calculating life insurance needs for a working individual using different methods. It calculates the needs using: 1) The multiple of earnings method, finding needs of $500,000 and $1,000,000 using 5x and 10x the individual's $100,000 income. 2) The actual need method, calculating nominal and present value amounts of living expenses and resources from other sources over two periods. The nominal calculation finds a need of $658,200 while the present value calculation finds a lower need of $411,811. 3) It explains that the present value calculation assumes proceeds can earn interest to fund some needs, requiring less insurance, but depends on investment returns

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd

    Lec 8 - Example Answers

    Uploaded by

    Encik Hazreen
    9 views2 pages
    This document provides an example of calculating life insurance needs for a working individual using different methods. It calculates the needs using: 1) The multiple of earnings method, finding needs of $500,000 and $1,000,000 using 5x and 10x the individual's $100,000 income. 2) The actual need method, calculating nominal and present value amounts of living expenses and resources from other sources over two periods. The nominal calculation finds a need of $658,200 while the present value calculation finds a lower need of $411,811. 3) It explains that the present value calculation assumes proceeds can earn interest to fund some needs, requiring less insurance, but depends on investment returns

    Original Title

    Lec 8 -- Example Answers

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    This document provides an example of calculating life insurance needs for a working individual using different methods. It calculates the needs using: 1) The multiple of earnings method, finding needs of $500,000 and $1,000,000 using 5x and 10x the individual's $100,000 income. 2) The actual need method, calculating nominal and present value amounts of living expenses and resources from other sources over two periods. The nominal calculation finds a need of $658,200 while the present value calculation finds a lower need of $411,811. 3) It explains that the present value calculation assumes proceeds can earn interest to fund some needs, requiring less insurance, but depends on investment returns

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    9 views2 pages

    Lec 8 - Example Answers

    Uploaded by

    Encik Hazreen
    This document provides an example of calculating life insurance needs for a working individual using different methods. It calculates the needs using: 1) The multiple of earnings method, finding needs of $500,000 and $1,000,000 using 5x and 10x the individual's $100,000 income. 2) The actual need method, calculating nominal and present value amounts of living expenses and resources from other sources over two periods. The nominal calculation finds a need of $658,200 while the present value calculation finds a lower need of $411,811. 3) It explains that the present value calculation assumes proceeds can earn interest to fund some needs, requiring less insurance, but depends on investment returns

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 2

    Lecture 8 Example Answers

    Example 1. Applying the Risk Management Framework. The party animal suddenly gets wise about the many liabilities that might be associated with the keggers he likes to host around the pool at his apartment complex. What can he do about them? Apply all 4 risk management strategies. Avoid: Stop hosting parties Reduce: Probability: Party away from the pool Magnitude: Hire a sober life guard Retain/assume: Be prepared to compensate damages Insure: Obtain an umbrella liability policy Example 1. Insurance Need Analysis How much life insurance is needed a working individual whose spouse is employable but not working? There are no other dependents. Assume current household income is $100,000. Calculate life insurance need using, respectively, (i) the multiple of earnings method and (ii) the actual need method. For the actual need method, calculate need in both nominal and present value amounts. For the PV calculations, assume APR=5%. Explain why the latter two calculations differ and which one makes more sense to you. [Hint: For the present value of the actual need calculations, use a PVA calculation within each period, then use a PV calculation to discount period 2 (years 13-30) back to t=0.] (a) Estimated future need
    Years, by period 1-12 13-30 Immediate Need Living Expenses Number of years Nominal Need PV Need (t=0, i=5%) Total Nominal Need Total PV Need $270,000 $62,000/yr 12 $1,014,000 $819,522 $1,914,000 $1,144,982 -$50,000/yr 18 $900,000 $325,460*

    (b) Resources from other sources (for dependents)


    Years, by period 1-12 13-30 Income Liquid Assets Number of years Nominal Resources $38,400 $165,000 12 $625,800.00 $35,000 18 $630,000.00

    PV Resources (t=0, i=5%) Total Nominal Resources Total PV Resources

    $505,348.86

    $227,821.98*

    $1,255,800 $733,171

    Solution: Insurance needed (i) Multiple of income method (see completed worksheet below): 5 x $100,000 = $500,000 10 x $100,000 = $1,000,000 (ii) Actual need method: Using nominal calculation: $1,914,000 - $1,255,800 = $658,200 Using present value calculation: $1,144,982 - $733,171 = $411,811 Nominal need calculation makes no assumption about earnings on the insurance proceeds. PV calculation assumes proceeds could be placed into an annuity that earns interest, so some need can be funded out of earnings. Latter approach requires less insurance but depends on investment returns and is less forgiving of higher inflation.

    You might also like