PFIN 2nd Edition by Lawrence Gitman ,Michael Joehnk,Randall Billingsley

Exercise 2

Use Worksheet 8.1. Ava Turner is a 72-year-old widow who has recently been diagnosed with Alzheimer's disease. She has limited financial assets of her own and has been living with her daughter Kathleen for 2 years. Her only income is $850 a month in Social Security survivor's benefits. Kathleen wants to make sure her mother will be taken care of if Kathleen should die. Kathleen, 40, is single and earns $55,000 a year as a human resources manager for a small manufacturing firm. She owns a condo with a current market value of $100,000 and has a $70,000 mortgage. Other debts include a $5,000 auto loan and $500 in various credit card balances. Her 401(k) plan has a current balance of $24,500, and she keeps $7,500 in a money market account for emergencies. After talking with her mother's doctor, Kathleen believes that her mother will be able to continue living independently for another 2 to 3 years. She estimates that her mother would need about $2,000 a month to cover her living expenses and medical costs during this time. After that, Kathleen's mother will probably need nursing home care. Kathleen calls several local nursing homes and finds that it will cost about $5,000 a month when her mother enters a nursing home. Her mother's doctor says it is difficult to estimate her mother's life expectancy but indicates that with proper care some Alzheimer's patients can live 10 or more years after diagnosis. Kathleen also estimates that her personal final expenses would be around $5,000, and she'd like to provide a $25,000 contingency fund that would be used to pay a trusted friend to supervise her mother's care if Kathleen were no longer alive. Use Worksheet 8.1 to calculate Kathleen's total life insurance requirements and recommend the type of policy she should buy.