John (40) and Kristin (38) are the married parents of two young children (ages 6 and 8). John is employed in the financial services industry with an stable annual salary of $250,000. Kristin has chosen to leave her career as a pharmacist temporarily to be at home with their young children. John and Kristin have different levels of risk tolerance. John tends to be a riskier investor and Kristin is by far more conservative. The family has no outstanding debt outside of a mortgage on their primary residence. The outstanding mortgage balance totals $190,000 against a fair market value of the home of $320,000. Their liquid assets consist of jointly held bank deposits ($15,000), mutual fund ($55,000) and combined retirement assets of $120,000 (john $85,000 and Kristin $35,000) . The only life insurance they own is a one year term policy on John through his employer that covers 2x his base salary. Kristin does not carry any life insurance.
The family spends roughly 37% of John's base salary on taxes, etc with the remainder used to provide for their family. They plan to retire at age 67. Assume a 5% opportunity cost in any analysis.
Kristin and John's goals are to provide enough life insurance in the event of his premature death to provide for their children to age 18 and to provide some funds for their college education ($300,000 in total for both kids).
Determine the “family type” John and Kristin represents and discuss the level of need for life insurance given this family type. Calculate the amount of insurance they should obtain given their personal information and goals as noted above using all four methods we discussed in class. Finally, what type of life insurance would you recommend they obtains and why?
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