Budget Approach Recommendation

Calculation:

Total expenses Teresa wants to cover:

• Funeral costs: $15,000
• College fund: $60,000
• Daughter’s care (10 years): $20,000/year * 10 years = $200,000

Total expenses = $15,000 + $60,000 + $200,000 = $275,000

Therefore, under the budget approach, Teresa would need $275,000 in life insurance coverage.

Income Replacement Approach Recommendation

Calculation:

There are two parts to consider in the income replacement approach:

1. Income replacement percentage: Typically, you’d want to replace 50-75% of Teresa’s income to maintain her daughter’s standard of living. Let’s assume we use 75%.
2. Number of years of income replacement: This depends on Teresa’s daughter’s age and how long she’d financially rely on Teresa. Let’s assume 5 years for this example.

Income replacement amount: $45,000/year * 75% = $33,750/year Total income replacement needed: $33,750/year * 5 years = $168,750

Therefore, under the income replacement approach, Teresa would need $168,750 in life insurance coverage.

Recommendation

In this situation, the Income Replacement Approach is a better recommendation for Teresa’s life insurance needs. Here’s why:

• The income replacement approach considers Teresa’s income and its impact on her daughter’s future financial needs. It ensures there’s enough money to cover ongoing expenses, not just one-time costs.
• The budget approach only accounts for specific expenses Teresa identified, but it might not capture all future financial needs the daughter may have.

Additional factors to consider:

• Teresa’s existing debts (if any)
• Teresa’s daughter’s age and potential future education costs beyond the $60,000

By considering these factors, Teresa can get a more accurate picture of the total financial protection she needs through life insurance.