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Discussion Case

Wendy and Frank Kampe, 30 and 35, are considering the purchase of life insurance. Wendy doesn't have any coverage whereas Frank has a $150,000 group policy at work. The Kampes have two young children, ages 3 and 5. Wendy earns $28,000 annually from a part-time, homebased business. Frank's annual salary is $55,000. From their income, they save $7,500 a year. The rest goes for expenses. The couple estimates that the children will be financially dependent, except for college costs, for about another 15 years. Once the children are in college, Wendy assumes their annual expenses will be $60,000.
In preparation for a visit with their insurance agent, the Kampes have estimated the following expenses if Frank were to die:

They also anticipate, should Frank die, receiving $8,000 a year in Social Security survivor's benefits until the youngest child turns 18, and $5,000 annually in pension benefits, until Wendy turns 80. Wendy projects her gross annual income to be $40,000 after her business expansion. Once the children are self-supporting, Wendy wants to plan a spousal life income for 15 more years, from age 45 to age 60. Lastly, she wants to plan on $30,000 a year in retirement income for another 20 years from age 60 to age 80. She anticipates receiving a 5 percent after-tax, afterinflation return on their investments.
To date, the Kampes have accumulated a total of $107,000 of assets, not including $45,000 of home equity. Their assets include $10,000 in an emergency fund, $12,000 in IRA funds for Wendy, $35,000 in other investments, and $50,000 in Frank's employer 401 {k) plan.


1. Using Worksheet 12,determine the amount ofadditional life insurance, ifany, that the Kampes should purchase to protect Wendy ifFrank should die. (Hint: Wendy's IRA balance is included in the total available assets on line ff. This is an assumption that would not be right for every situation given that access to the money would be limited by IRS withdrawal taxes and penalties.)

2. Should Wendy purchase an insurance policy? Why or why not? If so, what type of policy would you recommend for Wendy?

3. What type of life insurance policy would you recommend that Frank purchase?

4. What would happen to Frank's group life insurance if he leaves his present job?

5. What could happen to the Kampes' children if Frank or Wendy should die without adequate life insurance coverage? 6. Should the Kampes name the children as life insurance beneficiaries?

7. Which life insurance riders might the Kampes select when purchasing a policy?

8. Since they will make a concerted effort to become informed about life insurance, should the Kampes also purchase life insurance on the children, rather than waiting until later when they would have to reeducate themselves for life insurance shopping?

9. The Kampes save $7,500 a year for an emergency fund, retirement, and other investments, with the remainder spent to support their lifestyle. How the concept of mental accounting and Principle 9 might: Mind Games, Your Financial Personality, and Your Money affect their decision to purchase life insurance?


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