Pauline and George, age 32 and 35 respectively, have been working for the same bank for the last eight years. When their baby girl, Nancy, was born recently (age 1 now), they decided that Pauline would switch to work part-time because it would cost at least $45,000 per year to hire a domestic worker to care for the baby and helping out in cooking and cleaning. Her income, however, will fall to $35,000 per year, after-tax. George earns $85,000 per year after tax with good company benefits, including life insurance of $240,000. They expect that their income will increase at the rate of inflation, expected to be 2% per year.

An overview of their annual expenses follows:

Housing $28,000

Basic personal $12,000

Transportation $15,000

Discretionary $6,000

Travel $10,000

Child related $18,000

Miscellaneous $5,000

Savings $26,000

George does a lot of things in house maintenance, repair, mowing the lawn, shovelling snow etc. He estimates that doing all these things himself has saved the family at least $7,000 per year. They are both non-smokers in excellent health. They intend to retire at 65. The nominal rate of interest is 7%.

Assume each will be financially independent in their retirement years.

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

Basic personal $12,000 reduced by 20%

Transportation $15,000 reduced by 30%

Travel $10,000 reduced by 40%

Savings $26,000 eliminated

Child related expenses will be as follows:

From now until age 5 - $18,000

Age 5 12 - $10,000

Age 12-18 - $5,000

Age 18 no further financial support (CPP Child will stop).

Tax rates
	Marginal	Average
Pauline	20.05%	14%
George	37.16%	25.16%

CPP Survivor amounts

Type of pension or benefit	Average amount for new beneficiaries (October 2022)	Maximum payment amount (2023)
Retirement pension (at age 65)	$717.15	$1,306.57
Post-retirement benefit (at age 65)	$9.53	$40.25
Disability benefit	$1,078.07	$1,538.67
Post-retirement disability benefit	$524.64	$558.74
Survivor's pension-younger - than 65	$480.52	$707.95
Survivor's pension - 65 and older	$313.59	$783.94
Children of disabled CPP contributors	$264.53	$281.72
Children of deceased CPP contributors	$264.53	$281.72
Death benefit (one-time payment)	$2,499.44	$2,500.00

* https://www.canada.ca/en/services/benefits/publicpensions/cpp/payment-amounts.html

Assume that Paulines contributions will provide for the average benefit amount and Georges contributions will provide for the maximum benefit.

Required:

A) Using the Income Approach, calculate the amount of life insurance that each financial contributor needs.

B) Using the Expense Approach, calculate the amount of life insurance that each financial contributor needs.

C) Apart from the risk of premature death, identify two different risks that face this family and assess the significance / severity for the family.