Dave, aged 44, and Adele, aged 41, are new clients. Dave works in sales for a large pharmaceutical company. His base salary is $170,000 a year and his annual commissions are around $50,000 a year. Adele, is a real estate agent. She works from home and typically earns $140,000 a year (approximately $100,000 after she pays realtor expenses). Both Dave and Adele are happy with their careers and believe they could find employment easily, if something should happen. Dave has stated that he would like to move into a senior management role at his company or a competitor.

Dave and Adele are married and they have two children: Harvey, aged 17, and Carol, aged 16. Adeles mother, Debbie, lives with them. Debbie is 72 years old and widowed. Debbie moved in with Dave and Adele to help with their children, however her health has started to deteriorate. Adele thinks her mother will live until she is 80 years-old.

When their daughter Carol was born, Dave and Adele purchased a new home. The house cost $600,000, and has an outstanding mortgage of $270,000. Although Dave and Adele do not plan on moving, the house, based on its location, was appraised at $2.3 million. The mortgage on their home is the only long-term debt they have and the mortgage is insured with the lender (bank), should Dave or Adele die (joint first to die policy).

Although working in sales has been hard, both Dave and Adele have done well. Daves employer provides all employees with group benefits, which Adele and the children are enrolled in. Here is a summary of his group benefits:

• Life Insurance: Two times base salary (excludes bonuses and commissions) to a maximum of $300,000.
• Dependant Life Insurance: $25,000 employee spouse, $10,000 employee dependant child.
• Extended Health Coverage: Plan covers spouse and children living in the same household. No deductibles or maximums. Coinsurance 80%.

In addition to the group insurance, Dave and Adela have a $250,000, 20-year term, joint first-to-die life insurance policy. They purchased the policy when they married, and it expires in 1-year.

Assumptions:

1. Dave and Adele retire at age 65.
2. Their incomes do not change, including bonuses and commissions.
3. Use marginal tax rates where applicable.
4. Assume the cost of insurance is not a factor that influences Dave or Adeles decisions.

Question 1

Using the income approach, calculate the amount of life insurance Dave should purchase based on his net pay. (6 marks)

Question 2

Using the income approach, calculate the amount of life insurance Dave should purchase based on his net pay. (6 marks)

Question 3

Based on the information in the case, what type of life insurance is recommended for Dave and Adele and why? (3 marks)