CASE STUDY

Stan and Siri Sanchez, both aged 35, have three small children. Sally age 10, Steven age 8, and Savannah, age 3. The Sanchez want to ensure that they have adequate resources in place to complete their estate plans, should Stan pass away prematurely. Considering their current resources and expressed needs as noted below, what is an appropriate amount of life insurance they should consider?

Needs

Pay final expenses of $22,000

Repay credit card debt of $8,000

Repay mortgage on the family home of $250,000

Repay car loan of $7,000

Establish an educational fund of $60,000 for the children

Charitable bequest of $15,000 Current Resources / Assets

Cash in savings account of $9,000. Group insurance on Stans life of $75,000

Spousal group insurance on Siris life of $40,000

If Stan dies, Siri will start to work as a teacher and will earn $55,000 per year. She will participate in the teachers pension plan until age 60, at which time her retirement pension will be approximately $24,000 per year. Objectives They want to maintain the family income at $75,000 per year while the children are minors, then $60,000 until Siris retirement at age 60, and $55,000 thereafter. They are assuming Siri will live to age 90. For planning purposes, they have chosen to disregard any provisions for government sponsored benefits arising from a premature death, and any tax deductions for Siri.

Note: To simplify the capital needs analysis, ignore inflation and assume a 4% rate of return can be earned on any monies invested to generate income.

Assignment:

Assume that Stan has just died. Taking into considering the Sanchez current resources and expressed needs, answer each of the following questions and show your calculations, where appropriate.

Questions 1. What is the immediate net cash position after paying final expenses? [2 marks]

2. If they were to also repay their debts and cover other lump-sum needs, how much additional liquid cash would be required? [3 marks]

3. With respect to their long-term income needs, what is the annual income shortfall in each of the periods identified? [3 marks]

4. It has been determined that on average there will be a shortfall of $2,300 per month in ongoing income to meet all the long-term income needs. They do not want to use up any capital, only the earnings on that capital, to cover the shortfall. How much capital would be required to cover this shortfall, if they could get an investment return of 4% per year on that capital? [2 marks]

5. Using the information from the questions 1, 2 and 4, what is the additional amount of insurance on Stans life that would be required to meet the familys objectives? [2 marks]

6. What type of insurance and in what amounts would you recommend? Provide an explanation to justify each of your recommendations. [3 marks]