home / study / questions and answers / business / finance / your friend john asks you for advice concerning ... Question Your friend John asks you for advice concerning life insurance. John is 40 years old and graduated from law school last year. He currently earn $43,000 per year as a first year attorney. John is married and has two children, Billy, age 12, and Sarah, age 4. John's wife, Mary, is a professor who currently earn $56,000 per year. Mary is 38 years old. John and Mary pay $1,700 per month for their home mortgage, which will be paid off in 15 years. The interest rate on their mortgage is 3.5%. (Their current equity in the home is $50,000) The couple owns two cars, both 8 years old, and personal property( such as cloths, electronic, furniture, etc) valued $35,000. Their investments have been used up paying for John's law school education, so they currently have only $1,000 in savings and checking accounts, and $2,000 in a mutual fund. John has no life insurance. Mary has $125,000 of life insurance provided by her employer. Mary' pension plus social security are expected to total $65,000 per year, beginning when she is 67 years old. If John should die, Mary would receive approximately $12,000 per year from social security until Billy reaches age 18, and $6,000 per year after that until Sarah reaches age 18. Mary'semployer subsidizes 75% of family' healthcare costs, so the family only pays about $3,000 per year out of pocket. John and Mary spend most of their current income, although they do try to save about $50 per month. Their investments earn approximately 4% per year. Inflation is currently rather low at about 2% per year, but John wonders if it will increase after the Federal Reserve stops their expansive monetary policy. In addition to their home mortgage, John makes student loan payment of $400 per month. He plans to pay back the loan in 4 years and the loan' interest rate is 6% per year. Given that Mary enjoys a flexible work schedule, and because Mary' mother lives close by and watches the kids two days per week, they currently are not paying any child care expenses. John is worried about what may happen to his family is he should die. He is considering the purchase of life insurance and asks your advice. question: Assuming neither John nor Mary will receive large inheritance, how much life insurance do you think John needs on his life? (Use the needs approach.) Show all calculation and explain your answer. Make any assumptions you believe are reasonable, and make sure your assumptions are clearly stated. Also indicate the type of insurance you would recommend, whole life or term, and explain why. If you select term insurance, indicate the number of years of coverage to purchase
