June 30, 2022. Elaine, aged 44, is a Data Specialist. Her husband, Paul, aged 42, is a Production Manager. Annually, Elaines gross earnings are $122,000 and Pauls gross earns are $94,000. They have three children, Mady, aged 14, Travis, aged 11 and Marc, aged 9.

Elaine and Paul give you the following information regarding their current finances:

Elaine and Paul Net Worth Statement June 30, 2022

Liquid Assets Current Liabilities

Joint Chequing Account 8,852 Elaine Credit Card, 19.5% 5,412

Joint Savings Account 29,542 Paul Credit Card, 20.97% 5,458

Paul Vehicle Loan, 4.13% 6,525

Investment Assets Credit Line, 6.25% 31,562

Elaine TFSA 27,856

Paul TFSA 41,525 Long-term Liabilities

Elaine RRSP 58,940 Mortgage - Ottawa Home 561,200

Paul RRSP 42,596

Elaine DC Plan (Note 1) 139,568

Real Estate Assets

Home - Ottawa 1,050,000

Personal Assets

Elaine Vehicle 14,800

Paul Vehicle 21,900

Total Assets 1,435,579 Total Liabilities 610,157

Net Worth 825,422

Note 1: The defined contribution plan (DC Plan) is from Elaines prior place of employment. The funds are for retirement savings. Elaine selects the investments based on the limited fund options within the DC Plan. The before-tax real rate of return for the DC Plan is 3.6% pa.

Their TFSAs and RRSPs are invested in the below funds:

Fund	E(r ) before-tax	TFSA	RRSP
Fixed interest	3.65%	11,285	45,751
Canadian Equities	10.15%	35,854	49,196
International Equities	10.45%	22,242	6,589
Total		69,381	101,536

Elaine and Paul plan to use the funds in their TFSAs for future travel plans and emergency funds. The funds in the RRSPs and DC Plan are their current retirement savings. Elaine and Paul make annual contributions of $5,000 and $7,000 respectively to their RRSP accounts.

Their monthly cash flow surplus is $450.

One of Elaine and Pauls financial savings goals is to have $900,000 (before-tax dollars) saved for retirement when Paul turns 65.

Elaine and Paul provide the following information regarding their group insurance coverage:

Life Insurance

o Elaine, 2 x base salary to a maximum of $225,000. Beneficiary, Paul.

o Paul, 1 x base salary. Beneficiary, Pauls Mom.

Disability Insurance

o Elaine, coverage for 70% of gross income, to a maximum of $7,000 a month. The coverage has a 180-day elimination period and covers any occupation definition.

Extended Health Coverage

o Comprehensive, covers prescription drugs, paramedical. $100 per person annual deductible, no maximum, coinsurance 80%.

Dental: Comprehensive, $25 deductible per claim.

Vision: Covered with an annual maximum of $500 per claimant.

In addition to the coverage listed above, Elaine and Paul tell you that they have a jointfirst to die, term life insurance policy with a face value of $250,000 and three years until maturity.

Elaine and Paul recently had their home and auto insurance coverage reviewed and implemented all the recommended changes to ensure adequate coverage.

Assumptions:

Tax rates:

Taxpayer	Average Tax Rate (Federal and Provincial)	Marginal Tax (federal and Provincial)
Elaine	26.63%	43.41%
Paul	22.08%	33.89%

Inflation 3%.

A. Identify four risks that Elaine and Paul are exposed too (think risk management) and explain why they are risks and how the risks you have identified impact their personal finances? You can answer this question without showing calculations. (8 marks)

B. Using the income approach, calculate the amount of life insurance should each purchase to protect their family finances? Round up to the nearest $10,000 and assume they will retire when Paul turns 65. Assume payments are at the beginning of the period, use real after-tax interest rate of 2%, and ignore the CPP benefits. (12 marks)