CONTINUING CASE: CORY AND TISHA DUMONT

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Copyright ©2010 Pearson Education, Inc. publishing as Prentice HallCONTINUING CASE: CORY AND TISHA DUMONTPART 3:PROTECTING YOURSELF WITH INSURANCE1.Using the earnings multiple approach, how much additional life insurance coverage shouldCory and Tisha purchase to ensure their financial security in the event of an untimely death?Using the earnings multiple approachwould result in the following life insurance calculations forCory and Tisha.Cory’s needs= $38,000 x (1–0.22) x 12.46 = $369,314Tisha's needs= $46,000x (1–0.22) x 12.46 = $447,065Cory currently has $76,000 (2 x $38,000) ofterm life insurance through his employer.Consequently, Cory should consider purchasing approximately $293,000of additional lifeinsurance coverage. Tisha has $69,000 of term insurance through her employer, as well as awhole life policy of $50,000. She should consider purchasing an additional $328,000of lifeinsurance coverage ($447,065–$119,000). While Tisha or Cory would continue to earntheir salaries, if widowed, and would receive some Social Security benefits, they wouldexperience asignificant reductionin their standard of living without adequate life insurance.2.Why is it risky for Cory and Tisha to rely solely on employer-provided life insurance, andwhat should they do to mitigate this risk?The Dumonts, and Cory in particular, take a big risk when their life insurance is entirely in thehands of their employers. If Cory or Tisha leave their jobs, their group term coverage ends.However, they may be able to convert the group coverage to an individual policy. Since theDumontsneedadditionallifeinsurance,theyshouldpurchaseindividualpoliciestosupplement the coverage they have. This will reduce the risk of later becoming uninsurableor, if they were to lose their jobs, having no life insurance at all.3.Why is term life insurance recommended for the Dumonts at this stage in their financial lifecycle, and what are the potential downsides of universal or variable life insurance for them?At their stage in the life cycle, term insurance is the best option for the Dumonts. It provides thegreatest amount of insurance per premium dollar. Universal and variable life policies bothincludecashvaluecomponents,throughearningsfrominterestormutualfunds,respectively, whichincrease the cost of insurance coverage. These policies also tend to havehighinsurance,investment and administrative expenses, which add to their cost. The optionto skip the premium payment on universal lifeor a variable universal lifemay prove tootempting, as it does for many policyholders, who subsequently let the policy lapse. TheDumonts would be well advised to purchaseaffordableterm insurance and do theirsaving/investing outside of their insurance policies.4.What are the key life insurance policy features that should be explained to the Dumonts, andhow do they impact the policies they currently hold?The life insurance policy features that should be explained to the Dumonts include:

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