David is an electrician who has recently started his own business and earns $110,000. His wife, Mary, works part-time as a consulting engineer and earns $25,000. David is aged 45 and Mary is 39. They have two children: Julie, aged 4, and Percy, aged 12. David and Marry wish for all their children to receive a university education. To provide for this, they estimate that $100,000 should be set aside. The children would be dependents until they turn 25.

The family’s basic living expenses are $2,500 per month. In addition, for each family member (including parents), this will increase by $1,100 per person. They have a mortgage of $250,000 on their home, which has a current market value of $600,000. Credit cards, personal loans and other outstanding debts amount to $30,000. David has a 2018 model car, which is leased and has $25,000 outstanding on it at present. Mary has a 2011 model van so that she can transport the children to school and their other activities. Her van is valued at $8,000 and is fully paid for. Expenses including funeral, legal and medical are expected to amount to $20,000. Additionally, they believe they need emergency funds of $22,000.

David has an accumulated superannuation fund, which has a balance of $200,000. Mary also has a personal superannuation account, which will provide her with sufficient funding once she can access it at age 65. David currently has a life insurance policy for a lump sum of $300,000 with Mary named as the beneficiary. Mary does not have any life insurance cover. Assume David’s life expectancy is 84 years and Mary’s is 86.

Required:

a) How much is the appropriate amount of life insurance cover required to provide for the family’s future needs in the event of David’s death? (13 marks)

b) If the investment rate is 2.5%, how much is the amount of life insurance cover required, using the multiple approach in the event of David’s death? (4 marks)

c) The use of the multiple approach for calculating a lump sum benefit to be taken out pursuant to a life insurance policy has been strongly criticised as being too simplistic in nature. Outline the basis for such criticism. (3 marks)

d) As a financial advisor, you find David and Mary reluctant to purchase an additional life insurance policy. Briefly discuss with them the importance of adequate life insurance in a financial plan. (3 marks)