bank2008 introduction ti financial planning

Question B-3 (Total= 18 marks)

(i) Maryanne is seeking sufficient life insurance cover to provide for her children. Currently Maryanne earns $95,000 p.a. and she has assessed that approximately 80% of this amount will be needed on an annual basis to support her children for 25 years. She would also like to provide an initial capital amount of $400,000 at the time of her death to cover funeral costs, clear the mortgage and money for education costs. Use the multiple approach to calculate Maryanne's life insurance cover required and assume an earnings rate of 6%. (a)Calculate the life insurance cover required. (4 marks)

(b) What difference would it make to your calculations in part a) of this question if the earnings rate was increased to 8%? Why would such a difference be expected? (5 marks)

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(ii). Markus recently lost his house and contents in a bushfire that he constructed 5 years ago for $180,000 and spent $40,000 at that time on various appliances, furniture, fixtures and fittings for the home (home contents). The current construction costs for a similar house would be $260,000 and the cost of replacing his home contents would be $45,000. The market value of the home contents at the time of the fire was $15,000. Markus has a home and contents insurance.

(a) Calculate the total value of the insurance claim to be made by Markus if the home and contents policy was a replacement value policy. (3marks)

(b) Calculate the total value of the insurance claim to be made by Markus if the home and contents policy was an indemnity value policy. (3marks)

(c) Comment on the likely premiums payable on each of the policies offered in parts a) and b) of this question - that is, although the sum insured is the same, will the premiums also be the same? (3marks)