Reading 12: Risk Management of Individuals

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Please refer to example: Life Insurance Needs of Jacques and Marion of Reading 12
Why life insurance amounting to 250,000 has been deducted two times under needs analysis method - 1) Under Capital Available 2) To calculate final life insurance
 
I see it. It doesn’t make sense. Did you try to contact CFA Institute about it? I wonder if it’s an error, because I don’t see any it mentioned in the errata.
 
you would deduct 250000 from capital available since it has been used for insurance.
you would remove it from final insurance amount because you have already allocated that amount to final insurance and do not need that much for the final insurance figure. (E.g. if you needed 400000 for final insurance, had already allocated 250000 (from above) to this number, now you need 150000).
I do not see this example in my books, I am guessing based on the statement made by the OP. So if I am wrong, please do ignore this post.
 
your example true, but if you follow the example on CFA material it’s book 2, in reading on Risk Management for Individuals check example under paragraph “5.2.2. Program Review”
There is “Exhibit 11. Financial Needs: Life Insurance Worksheet”, below this there’s also a paragraph explaining the required insurance.
What happens in this example is a Financial Needs analysis is done resulting in 2,137,478. Then current available Capital Analysis is done (which included the 250,000 life insurance as available capital) resulting in 645,000. Next deduct Total Available Capital from Total Financial Needs, which gave a shortfall of 1,492,478 (rounded to 1.5 million). Technically the life insurance is already deducted. But the next paragraph says that the required life insurance is deducted with the existing life insurance of 250,000, and only 1.25 million needs to be purchased.
This looks like double counting.
 
You need to look at the two parts of the problem - as I stated before.
Q1. You have set aside 250K in Insurance already. So how much MORE capital do you need? 1492478 … (Total Life insurance needed).
Q2. How much MORE LIFE INSURANCE do you need? 1.25 Million ADDITIONAL… (That is the key word you are missing)
It is two different questions, and obviously two different answers.
Does that make sense?
You need total Life insurance of 1.5 Mill, have 0.25 Million already - so need ADDITIONAL 1.25 Mill.
 
Nope. Still doesn’t make sense.
What the material and you mean is:
Total Life Insurance Need = Total Capital Need - Total Capital Available
But
Total Capital Available = Available Life Insurance + Other Available Capital
Additional Life Insurance Need = Total Life Insurance Need - Available Life Insurance
mathematically this implies
Additional Life Insurance Need = Total Capital Need - Available Life Insurance - Other Available Capital - Available Life Insurance
**Perhaps Available Life Insurance should never have been included as part of the Total Capital Available.
 
Any chance to get this reading without buying the curriculum. Since this is the only change from 2016, I don’t think it is worthwhile to repurchase the entire textbooks again.
 
IAmChris - if you register - you have access to the books whether you like it or not in electronic manner. You need to pay extra to get the “books” themselves. With the ebook - you can use VitalSource and print the chapter 150 pgs at a time, I believe.
 
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