PFIN 5th Edition by Randall Billingsley,Lawrence Gitman,Michael Joehnk

Exercise 2

Estimating life insurance needs. Use Worksheet 8.1. Alissa Fenton is a 72-yearold 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 Gloria for two years. Her income is $850 a month in social security survivor's benefits. Gloria wants to make sure that her mother will be taken care of if Gloria should die. Gloria, 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, Gloria believes that her mother will be able to continue living independently for another two to three 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, Gloria's mother will probably need nursing home care. Gloria 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. Gloria 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 Gloria were no longer alive. Use worksheet 8.1 to calculate Gloria total life insurance requirements, and recommend the type of policy that she should buy.