Study session 5 - reading 12 -life insurance needs. Exhibit 11- in the needs analysis example on p:437, the final conclusion is that the family needs 1.5m of life insurance but that Jacques should buy an additional 1.25m of insurance as he already has 250k now. However in the example under the cash available portion, the life insurance of 250k is already considered. So shouldn’t he technically need to go get 1.5m of insurance? Is there something im missing?
Thanks,
He needs a total 1.5 M
He has life insurance set aside for .25M (250K)[This is in cash / capital available]
so he needs 1.25 M MORE
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Why is this confusing?
Because the 250 was already considered in the cash available ! So even with the 250 on hand he still needs another 1.5m. The 1.5m is net of the 250k already on hand…
i cannot understand what you are saying in these two statements…
So even with the 250 on hand he still needs another 1.5m.
The 1.5m is net of the 250k already on hand……
if 1.5 includes the 250 K in hand - he needs 1.25 M more … does that make sense? If that makes sense - then the other statement is wrong …
these two are exact opposites of each other.
you need 30 mangoes total. you have 3 mangoes in hand … how many MORE do you need?
I see Mat127’s point here.
Total Financial Need - Total Capital Available = Life Insurance needs (1.5M)
Total capital available includes $250k for life insurance. If it was not included, insurance need would be 1.75M, and then reducing the 250k to get to 1.5M insurance needed would make sense.
But it looks like the 250k is being double counted here.
Thank you Sam for pointing it out.
My apologies CPK123, i couldn’t explain myself clearly last night.
Essentially it is basically like SAM mentioned, in the example the 250K of life insurance is already included in the Total Capital available. The 1.5M is net of the 250k already on hand, so there is still a lack of 1.5M for the family. However the example mentions 1.25M. Thus double counting the 250K…
Is this a mistake or i am seeing this from a wrong perspective? anyone else? if not there is a mistake in the curriculum.
I think I know how to explain this.
Jacques is the insured. He is purchasing Life insurance for the “rest” of his family.
If Jacques dies TODAY - how much insurance does his family have? 250K — since it is already purchased. and his family would have a heavy hole to fill…
Now Jacques did not die TODAY. He is dying way into the future … that is when the rest of the calc comes in … and shows requiring 1.5 M (rounded) in Life Insurance.
Now the 250 K is still something in the kitty (not been exhausted) so you need 1.25 M MORE!
Does that provide a satisfactory explanation?
The life insurance need of €1,500,000 is described as “total financial needs less total capital available”. As the €250,000 in life insurance already owned _ is included in total capital available _, Jacques needs to purchase an additional €1,500,000; the answer of €1,250,000 is incorrect.
I’ll e-mail CFA Institute about this.
That portion should’ve already been corrected in their ERRATA a while ago.
“Because Jacques already has 250k of Life insurance, he should purchase an addition 1.25mm according to this method.”
This part should be taken out according to the CFA Institute.
Silly me: I presumed that those already in the discussion had already checked the errata.
Well, the reply from CFA Institute will be interesting.
This part should be taken out according to CFA Institute.
Thank you AlexMo and S2000Magician, it is my mistake i should of checked the errata.
My pleasure.
It will be interesting to see how CFA Institute replies to the e-mail I sent them before I learned that this was already noted in the errata. I hope that they’re gentle with me.
Thanks for your continued support to the level iii candidates!
Note to self: Read the errata before the readings 