Marty and Mary have jobs and contribute to the household expenses according to their income. Marty contributes 75% of the expenses and Mary contributes 25%. Currently, their household expenses are $ 30,000 annually. Marty and Mary have three children. The youngest child is 12, so they would like to ensure that they could maintain their current standard of living for at least the next eight years. They feel that the insurance proceeds could be invested at 6 %. In addition to covering the annual expenses, they would like to make sure that each of their children has $25,000 available for college. If Marty were to die, Mary would go back to school part-time to upgrade her training as a nurse. This would cost $20,000. They have a mortgage on their home with a balance of $55,000.

How much life insurance should they purchase for Marty?

Answer explained

Explanation:

Firstly, we write down data & figures provided in question.

Annual household expense - $ 30,000

Marty contribution to household expenses is 75% amounting $ 22,500

Mary contribution to household expenses is 25% amounting $ 7,500

Rate of Interest on Investment - 6% per annum

Now question is how much life insurance should they purchase for marty so they can maintain current living standard and discharge other obligation in case of Marty's death.

Therefore, Insurance amount = Amount require to invest at 6% interest to provide annual interest income equals to marty's annual contribution to household expense + $ 75,000 (3x25,000) for college + $ 20,000 for nurse training + $ 55,000 for mortgage

Amount require to invest at 6% interest to provide annual interest income equals to marty's annual contribution to household expense = $ 22,500/0.06 = $ 375,000

Insurance Amount = 375,000 + 75,000 + 20,000 + 55,000 = $ 525,000