Ch 12 Practice Problems Textbook SolutionRev.docx

Ch 12 Practice Problems Textbook SolutionRev.docx -...

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PRACTICE FINANCIAL PLANNING PROBLEMS (p. 438) 1. Calculating Life Expectancy . Using Exhibit 12-1, determine the life expectancy of a 40-year old male. Solution: 78.5 years (See Exhibit 12-1) (40 years old + 38.5 expected additional years = 78.5) LO: 12-1 Topic: How Long Will You Live LOD: Easy 2. Calculating Life Expectancy . Using Exhibit 12-1, determine the average numbers of additional years males alive at age 35 may expect to live. Solution: 43.1 years (See Exhibit 12-1) LO: 12-1 Topic: How Long Will You Live LOD: Easy 3. Calculating Life Expectancy . Using Exhibit 12-1, determine the life expectancy of a 60-year-old female. Solution: 84.5 years (See Exhibit 12-1) (60 years old + 24.5 expected additional years = 84.5) LO: 12-1 Topic: How Long Will You Live LOD: Easy 4. Calculating the Amount of Life Insurance Needed Using the Easy Method. You are the wage earner in a “typical family,” with \$60,000 gross annual income. Use the easy method to determine how much life insurance you should carry. Solution: \$50,000 × 7 years = \$350,000 × .70 = \$245,000 LO: 12-2 Topic: Estimating Life Insurance Needs LOD: Easy 5. Calculating the Amount of Life Insurance Needed Using the Easy Method. Suppose that yours is a typical family. Your annual income is \$45,000. Using the easy method, what should be your need for life insurance? Solution: \$45,000 x 7 years = \$315,000; \$315,000 x 0.70 = \$220,500 LO: 12-2 Topic: Estimating Life Insurance Needs LOD: Easy 1

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6. Estimating Life Insurance Needs Using the DINK Method . You and your spouse are in good health and have reasonably secure jobs. Each of you makes about \$40,000 annually. You own a home with a \$90,000 mortgage, and you owe \$16,000 on car loans, \$4,000 in personal debt, and \$2,000 in credit card loans. You have no other debt. You have no plans to increase the size of your family in the near future. You estimate that funeral expenses will be \$6,000. Estimate your total insurance needs using the DINK method. One half of mortgage = \$40,000 One half of car loan = 7,500 One half of personal debts = 2,500 Solution: One half of credit card loans = 1,000 Funeral expenses = 5,000 Total insurance needs = \$56,000 LO: 12-2 Topic: Estimating Life Insurance Needs LOD: Medium 7.
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