Ethan, aged 42, works as a manager at Tech Innovations Inc. and earns $100,000 per year after taxes, a stable income expected to continue in the event of Olivia's passing. Olivia, aged 38, is a marketing manager earning $80,000 annually after taxes, with a similar income continuation plan if Ethan were to pass away. Both anticipate their incomes to grow at the rate of inflation and plan to retire at 65. The couple shares one child, Lily, aged 8.

Ten years ago, Ethan and Olivia purchased a cozy suburban home for $600,000. Their mortgage, the only long-term debt they hold, currently stands at $250,000. Thanks to recent developments in the area, the home's appraised value has surged to $900,000. The mortgage includes a joint first-to-die policy, ensuring it's covered in case of either Ethan or Olivia's demise.

For home protection, Ethan and Olivia secured a comprehensive homeowners' insurance policy with an 80% co-insurance factor, initially covering $500,000. This coverage remains unchanged, with a $1,500 deductible.

In terms of life insurance, Ethan has $350,000 of group coverage from his employer, while Olivia carries $200,000 in group coverage from her employer. Additionally, Ethan's disability insurance covers up to $5,000 per month, with a 120-day elimination period. Olivia's disability coverage provides similar protection, with a maximum benefit of $6,500 per month and a 90-day elimination period.

Both Ethan and Olivia own carsEthan drives a 2016 Toyota Camry, and Olivia owns a 2019 Honda CR-V. They have adequate auto insurance coverage to meet their province's requirements.

Their average tax rate is estimated to be 30%.

Questions

(a) (1) Identify at least 5 risks the family face, and (2) evaluate and explain the severity and frequency of each risk identified. (10 marks)

(b) Using the income approach, calculate life insurance needs for Ethan and Olivia each. (8 marks)

• Use a 2% after-tax real discount rate.
• Both Ethan and Olivia want to insure 80% of their income.
• They want to set aside CPP payments for emergencies and retirement. Thus, exclude survival/child CPP pension in your calculation.
• Assume each will be financially independent in their retirement years.

(c) Using the expense approach, calculate life insurance needs for Ethan and Olivia each (8 marks). The followings are additional information needed to apply expense approach.

Annual Expenses
Food	$20,000
Transportation	$8,000
Childcare	$18,000
Loan payments	$35,000
Clothing	$5,000
Home maintenance	$12,000
Utilities	$8,000
Miscellaneous	$10,000
Savings	$41,000
Entertainment	$8,000
Travel	$15,000

Changes in expenses if one of the income earners passes away:

• Food, transportation, clothing, miscellaneous - reduced by 30%
• Entertainment, travel - reduced by 40%
• Savings - eliminated
• Childcare expenses will be as follows:
  • From now - age 11 - $18,000
  • Age 12-17 - $12,000
  • Age 18-21 - $20,000
  • After Age 22 - eliminated
• Other expenses - stay the same.

Other conditions:

• Use a 2% after-tax real discount rate.
• They want to set aside CPP payments for emergencies and retirement. Thus, exclude survival/child CPP pension in your calculation.
• Assume each will be financially independent in their retirement years.
• Expenses will increase, matching inflation.

(d) Should Ethan and Olivia increase or decrease their disability coverage? Explain why. (5 marks)

(e) Should Ethan and Olivia amend their homeowners' insurance policy? If a fire occurred at their home, and it caused $200,000 in damages, how much would they receive if anything? (4 marks)