Question

Paolo and Maria Rossi are 38 years old and have one son, age 9 . Paolo is the primary earner, making $140,000 per year. Maria does not currently work. The Rossis have decided to use the needs analysis method to calculate the value of a life insurance policy that would provide for Maria and their son in the event of Paolo's death. Paolo and Maria estimate that while their son is still living at home, monthly living expenses for Maria and their child will be about $4,000 (in current dollars). After their son leaves for college in 9 years, Maria will need a monthly income of $3,300 until she retires at age 65 . The Rossis estimate Maria's living expenses after 65 will only be $2,900 a month. The life expectancy of a woman Maria's age is 87 years, so the Rossi family calculates that Maria will spend about 22 years in retirement. Using this information, complete the first portion of the needs analysis worksheet to estimate their total wing expenses.

Answer 1

To calculate the life insurance needs for Paolo Rossi, expenses are estimated in three stages: while their son is at home, after the son leaves home, and Maria's retirement years, totaling an estimated need of $1,910,400.

Step-by-step explanation:

The needs analysis method for life insurance is a financial planning tool used to determine the amount of life insurance necessary to cover the living expenses of dependents after the policyholder's death. To calculate the life insurance needs for Paolo Rossi, we focus on the three different stages as stated: while their son is dependent, after their son leaves home, and Maria's retirement years.

Steps in Needs Analysis

1. Calculate the total living expenses until the son leaves home: $4,000 monthly for 9 years.
2. Estimate monthly expenses for Maria after the son leaves for college until she retires: $3,300 monthly for 18 years.
3. Estimate Maria's monthly expenses during retirement: $2,900 monthly for 22 years.

Assuming no inflation and no investment return, the total living expenses are summed up for each stage:

• 
  
• Stage 1: $4,000 x 12 months x 9 years = $432,000
• 
  
• Stage 2: $3,300 x 12 months x 18 years = $712,800
• 
  
• Stage 3: $2,900 x 12 months x 22 years = $765,600

Adding these together gives a rough estimate of the total coverage needed:

$432,000 (Stage 1) + $712,800 (Stage 2) + $765,600 (Stage 3) = $1,910,400