Template:Life Insurance Calculator Case Study

From Planipedia

The Life Insurance Calculator helps you to determine the total amount of life insurance that your client will require in the event of death, including expenses that the client will plan to cover himself, rather than leave to successors. The calculator takes into account the client’s age, percentage of earned income that will need to be replaced, current insurance coverage, and lump sum benefits.

Contents 1 Example Problem One: 1.1 Solution using the Life Insurance Calculator: 2 Problem Example Two: 2.1 Solution using the Life Insurance Calculator:

Example Problem One:

Your clients are concerned that the event of the spouse’s death would cause financial instability and want to know the funds required to replace her income.

They have also told you that they would be like to replace 80% of her income until her planned age of retirement, and they want to include funeral expenses worth {{{Funeral Expenses1}}}. They also want to be able to pay off the remainder of their mortgage immediately – a value of about {{{Mortgage Balance}}}.

Solution using the Life Insurance Calculator:

In order to upload as much completed information as possible to the calculator, click the drop-down menu beside Scenario and choose Spouse’s Death. Immediately, the following fields will have changed from default values, to data already entered on other screens: Current Age, Current Earned Income, Replace Income to Age, Inflation, Current Insurance Coverage and Lump Sum Benefits.

1. The Percentage to Replace Salary field should be set to 80%.
2. Even though the Replace Income to Age was uploaded from the Personal Information screen, we could still elect to change it. As a default, it plans to replace income until the age of retirement. This may not always be the case – but for your clients this is correct.
3. The Inflation can be left as is.
4. The After Tax Rate of Return is a defaulted to the client’s inflation assumption plus 2.0% but could be overridden with a higher or lower assumption
5. In the Lump Sum Costs field, the clients wanted to include two expenses, with individual costs of {{{Funeral Expenses1}}} and {{{Mortgage Balance}}}: or {{{Combined Total}}} total. Set this field to {{{Combined Total}}}.
6. Click Calculate at the bottom of the screen.
7. Click Save once the results have populated to save the scenario.

Problem Example Two:

In the event of the client’s death, the spouse would like to be able to pay some lump sum costs without worrying about encroaching on capital she was saving for retirement. The lump sum costs include: funeral expenses of {{{Funeral Expenses2}}}, paying down the mortgage balance: currently {{{Mortgage Balance}}} and the employment of a nanny for their son that she expects will cost {{{Nanny Cost}}} for one year. The spouse wants to fund the replacement of 60.0% of the client’s income.

Solution using the Life Insurance Calculator:

In order to upload as much completed information as possible to the calculator, click the drop-down menu beside Scenario and choose Client’s Death.

1. The Percentage to Replace Salary field should be set to 60% as the spouse indicated.
2. Even though the Replace Income to Age was uploaded from the Personal Information screen, we could still elect to change it. As a default, it plans to replace income until the age of retirement, which is correct.
3. The After Tax Rate of Return is defaulted to the client’s inflation assumption plus 2.0%. Unless you wanted to override this value with a higher or lower assumption, this field can be left alone.
4. The spouse wanted to include three immediate expenses, with individual costs of {{{Funeral Expenses2}}}, {{{Nanny Cost}}} and {{{Mortgage Balance}}}, or {{{Combined Total1}}} total. Set the Lump Sum Costs field to {{{Combined Total1}}}.
5. Click Calculate at the bottom of the screen.
6. Click Save once the results have populated to save the scenario.

Go to the exercise to test your knowledge on calculating the need for Life Insureance coverage.