Ryan and Alison Nisbit are a two-income couple in their early 30s. They have two children, ages 6 and 3.
Ryan's monthly take-home pay is $3,600, and Alison's is $4,200. The Nisbits feel that, because they're
a two-income family, they both should have adequate life insurance coverage. Accordingly, they are
now trying to decide how much life insurance each one of them needs.
To begin with, they'd like to set up an education fund for their children in the amount of $120,000
to provide college funds of $15,000 a year-in today's dollars-for four years for each child. Moreover,
if either spouse should die, they want the surviving spouse to have the funds to pay off all outstanding
debts, including the $210,000 mortgage on their house. They estimate that they have $25,000 in
consumer installment loans and credit cards. They also project that if either of them dies, the other
probably will be left with about $10,000 in final estate and burial expenses.
Regarding their annual income needs, Ryan and Alison both feel strongly that each should have
enough insurance to replace her or his respective current income level until the youngest child turns 18
(a period of 15 years). Although neither Ryan nor Alison would be eligible for Social Security survivor's
benefits because they both intend to continue working, both children would qualify in the (combined)
amount of around $1,800 a month. The Nisbits have amassed about $75,000 in investments, and they
have a decreasing term life policy on each other in the amount of $100,000, which could be used to
partially pay off the mortgage. Ryan also has an $80,000 group policy at work and Alison a $100,000
group policy.
Critical Thinking Questions
1. Assume that Ryan's gross annual income is $54,000 and Alison's is $64,000. Their insurance
agent has given them a multiple earnings table showing that the earnings multiple to replace
75 percent of their lost earnings is 8.7 for Jacob and 7.4 for Alison. Use this approach to find
the amount of life insurance each should have if they want to replace 75 percent of their lost
2. Use Worksheet 8.1 to find the additional insurance needed on both Ryan's and Alison's lives.
(Because Ryan and Alison hold secure, well-paying jobs, both agree that they won't need any
additional help once the kids are grown; both also agree that they'll have plenty of income from
Social Security and company pension benefits to take care of themselves in retirement. Thus,
when preparing the worksheet, assume "funding needs" of zero in Periods 2 and 3.)
3. Is there a difference in your answers to Questions 1 and 2? If so, why? Which number do you think
is more indicative of the Nisbits' life insurance needs? Using the amounts computed in Question
2 (employing the needs approach), what kind of life insurance policy would you recommend for
Ryan? For Alison? Briefly explain your answers.


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