Billy, age 38, has married and has two children ages 3 and 7. He is working as a purchasing manager in an international trading firm and earns $1,000,000 per year. His wife Karen, age 35, is a full-time housewife who looks after the family and two children. Billy is reviewing his insurance requirements and has identified the following after deducting all liabilities, expenses, and necessary provisions. Billy and Karen would like to retain those items which can help to generate income as part of the living expenses. In addition, it is necessary to keep the residential flat for their own use. It is estimated that the overall annual expense is about $300,000 for Karen and their two children to maintain similar living standards if Billy died prematurely.

(Show all your steps of calculation and round up to 2 decimal places.)

Items owned by Billy:

Residential flat $6,000,000

Preference share $150,000

Automobile $160,000

Income securities fund $500,000

Investment grade corporate bond $200,000

Jewels $100,000

Gold coins $50,000

Total: $7,160,000

Assume that on average, the required return from those assets can earn 4% annually.

a. Identify those income producing items and determine the total amount of annual income that can be generated from them. (5 marks)

b. What is the shortfall of the familys annual expense if Billy died prematurely after taking into consideration point (a) above? (1 marks)

c. According to the Capital Retention Approach, determine the amount of life insurance that Billy should purchase to cover the shortfall. (2 marks)