Peter Fresco, 40, is a middle school teacher earning $70,000 per year His wife, Lyn, 40, is a staff at the retail store, earning $55,000 per year They have an 8 year old son, who goes to elementary school and daycare Both intend to work until they are 65 years old, and if their spouse dies, they will continue to work at the same job and earn the same income The family currently spends $100,000 per year, but if one of the couples dies, the annual expenditure will fall to $80,000 per year until the child goes to university at age 18, which is 10 years from now Once the child goes to university, he will become financially independent, and the expenses will drop to $60,000 per year Frescos have set up RRSP for retirement and RESP for the childs education, but RRSP will be used to fund the surviving spouses retirement and RESP will be reserved for the child They own a home but unfortunately do not have any other savings Ignore taxes and inflation in this question Ignore survival child CPP pension in your calculation Assume insurance is required at the beginning of the year Assume the appropriate real discount rate of 3 Assume that all the dollars in this question are real dollars Required 1 Identify at least three of the most likely material risks for the Frescos Explain why the family or the financial planner of the family should take those risks into account 2 What is the amount of life insurance that the Frescos needs under the Income Approach Assume that 100 of income needs to be insured Assume that after retirement, there will be no income shortfall Round to nearest $100,000 (e g , $1,463,376 $1,500,000, $1,532,576 $1,500,000) 3 What is the amount of life insurance that the Frescos needs under the Expense Approach (12 Marks) Assume that 100 of expenses need to be insured Assume that after retirement, there will be no income shortfall Round to nearest $100,000 (e g , $1,463,376 $1,500,000, $1,532,576 $1,500,000)

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Apr 24, 2022

Peter Fresco, 40, is a middle school teacher earning $70,000 per year. His wife, Lyn, 40, is a staff at the retail store, earning $55,000

Peter Fresco, 40, is a middle school teacher earning $70,000 per year. His wife, Lyn, 40, is a staff at the retail store, earning $55,000 per year. They have an 8-year-old son, who goes to elementary school and daycare. Both intend to work until they are 65 years old, and if their spouse dies, they will continue to work at the same job and earn the same income.

The family currently spends $100,000 per year, but if one of the couples dies, the annual expenditure will fall to $80,000 per year until the child goes to university at age 18, which is 10 years from now. Once the child goes to university, he will become financially independent, and the expenses will drop to $60,000 per year.

Frescos have set up RRSP for retirement and RESP for the child’s education, but RRSP will be used to fund the surviving spouse’s retirement and RESP will be reserved for the child. They own a home but unfortunately do not have any other savings.

Ignore taxes and inflation in this question.
Ignore survival/child CPP pension in your calculation.
Assume insurance is required at the beginning of the year.
Assume the appropriate real discount rate of 3%.
Assume that all the dollars in this question are real dollars.

Required:

1. Identify at least three of the most likely material risks for the Frescos. Explain why the family or the financial planner of the family should take those risks into account.
1. 2. What is the amount of life insurance that the Frescos needs under the Income Approach?
- Assume that 100% of income needs to be insured.
- Assume that after retirement, there will be no income shortfall.
- Round to nearest $100,000. (e.g., $1,463,376 ???? $1,500,000, $1,532,576 ???? $1,500,000)
- 1. 3. What is the amount of life insurance that the Frescos needs under the Expense Approach? (12 Marks)
    - Assume that 100% of expenses need to be insured.
    - Assume that after retirement, there will be no income shortfall.
  Round to nearest $100,000. (e.g., $1,463,376 ???? $1,500,000, $1,532,576 ???? $1,500,000)