Question

1 Approved Answer

Posted on Aug 23, 2024

1. Chris and Christina, both age 40, have two children: Steven, 4, and Stephanie, 5. Both Chris and Christina are engineers whose work has them

image text in transcribed

1. Chris and Christina, both age 40, have two children: Steven, 4, and Stephanie, 5. Both Chris and Christina are engineers whose work has them frequently at construction sites. They wish to purchase life insurance but they do not know how much they need. They tell you they want coverage for the next 15 years. Using the following, information calculate their required amount of life insurance using the income approach. (a) They want to have at least enough money, in case of any one of their deaths, to have their children attend university debt free. (b) The children will (should) finish university in about 15 years. (c) Use a real rate of interest is about 3%. (d) Chris makes $95,000 a year with take-home pay of $66,500 a year. (e) Christina makes $100,000 a year with take-home pay of $70,500 a year. (f) They live in Alberta and have marginal tax rate of 30%. (g) They tell you they have insurance coverage at work that will pay them twice their gross annual salary if they die. 2. Chris and Christine from the previous question have the following assets: 6,000 20,000 50,000 Assets Bank accounts TFSAs for emergencies TFSAs for retirement Individual life insurance death benefits RESP RRSP Chris RRSP Christina Investments, non-registered 2,500 30,000 32,000 53,000 20,000 House at market value 725.000 Liabilities Consumer debt, loans Mortgage 6,400 340.000 Available Capital (Assets - Liabilities) Capital available to i. What is capital available? (b)Calculate the capital available to generate income for the survivors should one of them die using the below table (from question 1, they both have group life insurance): Available Capital If Christina dies, If Chris dies, Chris has Christina has Assets Bank accounts TFSAs for emergencies TFSAs for retirement Group life insurance Individual life insurance CPP death benefits RESP RRSP Investments, non-registered House at market value Total Assets Liabilities Consumer debt, loans Mortgage Total Liabilities Available Capital (Assets - Liabilities) Capital available to Chris Christina (c) Assume the following: i. Their present total annual expenses are $106,000 ii. There are cost savings if one dies however, their living expenses would increase because they would need childcare support. Assume the expenses increase by $20,000. iii. They have mortgage insurance that would pay off the balance of the mortgage. This would give them an annual savings of $14,000. iv.Funeral expenses are estimated at $15,000 but they have pre-paid them. v.Both have pensions from their employers. Their plans are structured so that every dollar they contribute, their employer matches it. Currently they are contributing 6% of their gross salary. They assume they would continuing their contributions if one dies. vi.The CPP Survivor benefit is $6,400 before tax for both. vii.The CPP Child benefit is $4,600. viii.Assume both the CPP Survivor and CPP Child benefit are taxable at their marginal tax rate. ix. They want to increase their retirement savings by $10,000 a year If Christina dies, Chris has If Chris dies, Christina has Income Take-home pay CPP Survivor Benefit CPP Child Benefit Taxes on CPP (30%) Other Income Net Income Expenses Annual Expenses Additional Expense Mortgage Retirement Savings Total Expenses Net Expense PVA Available Capital (Assets - Liabilities) Life Insurance Required Capital available to Chris Christina (d) How does the answer change if they tell you they plan to work 20 years instead of 15 years? 1. Chris and Christina, both age 40, have two children: Steven, 4, and Stephanie, 5. Both Chris and Christina are engineers whose work has them frequently at construction sites. They wish to purchase life insurance but they do not know how much they need. They tell you they want coverage for the next 15 years. Using the following, information calculate their required amount of life insurance using the income approach. (a) They want to have at least enough money, in case of any one of their deaths, to have their children attend university debt free. (b) The children will (should) finish university in about 15 years. (c) Use a real rate of interest is about 3%. (d) Chris makes $95,000 a year with take-home pay of $66,500 a year. (e) Christina makes $100,000 a year with take-home pay of $70,500 a year. (f) They live in Alberta and have marginal tax rate of 30%. (g) They tell you they have insurance coverage at work that will pay them twice their gross annual salary if they die. 2. Chris and Christine from the previous question have the following assets: 6,000 20,000 50,000 Assets Bank accounts TFSAs for emergencies TFSAs for retirement Individual life insurance death benefits RESP RRSP Chris RRSP Christina Investments, non-registered 2,500 30,000 32,000 53,000 20,000 House at market value 725.000 Liabilities Consumer debt, loans Mortgage 6,400 340.000 Available Capital (Assets - Liabilities) Capital available to i. What is capital available? (b)Calculate the capital available to generate income for the survivors should one of them die using the below table (from question 1, they both have group life insurance): Available Capital If Christina dies, If Chris dies, Chris has Christina has Assets Bank accounts TFSAs for emergencies TFSAs for retirement Group life insurance Individual life insurance CPP death benefits RESP RRSP Investments, non-registered House at market value Total Assets Liabilities Consumer debt, loans Mortgage Total Liabilities Available Capital (Assets - Liabilities) Capital available to Chris Christina (c) Assume the following: i. Their present total annual expenses are $106,000 ii. There are cost savings if one dies however, their living expenses would increase because they would need childcare support. Assume the expenses increase by $20,000. iii. They have mortgage insurance that would pay off the balance of the mortgage. This would give them an annual savings of $14,000. iv.Funeral expenses are estimated at $15,000 but they have pre-paid them. v.Both have pensions from their employers. Their plans are structured so that every dollar they contribute, their employer matches it. Currently they are contributing 6% of their gross salary. They assume they would continuing their contributions if one dies. vi.The CPP Survivor benefit is $6,400 before tax for both. vii.The CPP Child benefit is $4,600. viii.Assume both the CPP Survivor and CPP Child benefit are taxable at their marginal tax rate. ix. They want to increase their retirement savings by $10,000 a year If Christina dies, Chris has If Chris dies, Christina has Income Take-home pay CPP Survivor Benefit CPP Child Benefit Taxes on CPP (30%) Other Income Net Income Expenses Annual Expenses Additional Expense Mortgage Retirement Savings Total Expenses Net Expense PVA Available Capital (Assets - Liabilities) Life Insurance Required Capital available to Chris Christina (d) How does the answer change if they tell you they plan to work 20 years instead of 15 years