Miles and Madison are your new clients. Miles, aged 39, is an IT specialist at ABC Sports Management, and earns $90,000 per year, after tax and this will continue if Madison passed away. Madison, aged 35, is a real estate agent and earns $70,000 per year, after tax and this will continue if Miles passed away. Their income will grow at the rate of inflation, and both plan to retire at 65. Miles and Madison are married and they have one child: Mia, aged 7.

They purchased a small townhouse 7 years ago when their daughter Mia was born. The house was purchased for $700,000 and has an outstanding mortgage of $350,000. The home value increased significantly due to recent development in the neighborhood and the appraised value of the home today is $1,000,000. The mortgage on their house is their only long-term debt, and it is covered by the lender (bank) in the event that Miles or Madison dies (joint first to die policy). They purchased a comprehensive homeowners' insurance policy with an 80 percent co-insurance factor when they purchased their home. The amount of coverage they initially had was $600,000 and there was no change to the amount of coverage over the years. The deductibles for the homeowners' insurance is $1,000. 

Miles has $300,000 of group life insurance coverage from his employer and Madison has $250,000 of group life insurance coverage from her employer. Miles' group benefits also provide disability insurance with coverage for 75% of gross income, to a maximum of $2,000 a month. The coverage has a 120-day elimination period. Madison's group benefits also provide disability insurance with coverage for 75% of gross income, to a maximum of $5,500 a month. The coverage has a 90-day elimination period.

Miles owns the 2017 Honda Accord and Madison owns the 2018 Chevrolet Cruze. Both of them have auto insurance and meets Ontario's required auto insurance guideline. 

The average tax rates of Miles and Madison are 30%. 

Required:

(a) Identify at least 5 risks Miles and Madison face, (2) evaluate and explain the severity and frequency of each. 

(b) Using the income approach, calculate life insurance needs for Miles and Madison.

• Use a 4% after-tax real discount rate. 
• As CPP payment amount is going to be very small, exclude survival/child CPP pension in your calculation. 
• Assume insurance is required at the beginning of the year. 

(c) Should Miles and Madison increase or decrease their disability coverage? Explain why.