Please help me with the calculation and the explanation of the questions in the case, thanks!

Case 5 The Butterfield Case AN INSURANCE PLANNING MINI-CASE John Butterfield, 49, and his wife Haley Butterfield, 44, live in a relatively new home on the outskirts of Anycity, Anystate. They have been married for 23 years and have three children. Both John and Haley are in excellent health. Their son Troy, age 20, is a baseball player on scholarship at the University of Anystate. Daughter Holly, age 17, hopes to attend State University next fall as a cadet to begin pursuing a career in the Marine Corps. The choices of their first two children have allowed the Butterfields to concentrate their college saving goals on Naomi, the youngest, at age 13. John and Haley have come to you for help in addressing several insurance planning questions and concerns. Use the following information to conduct a review of their financial situation and use your analyses to answer the questions that follow the case narrative. Global Assumptions (Valid unless otherwise Specified in Certain Instances) Inflation: 3.5% All income and expense figures are given in today's dollars. Federal marginal tax bracket: 25% State marginal tax bracket: 5.75% Any qualified plan or IRA contribution growth rates are assumed to stop at the federally mandated limit unless otherwise restricted. All nominal rates of return are pretax returns. Income Issues John has worked for the last 14 years as an engineer for CNS Design. He has an $81,000 salary. He would like to retire at age 67. Haley has worked as a CPA for 17 years, the last 14 of which have been out of their home. Though her earnings vary from month to month, she estimates that she will earn $65,000 this year. She wants to retire at the same time as John. They also assume that their salaries will increase, on average, by 3.5% per year over their working lives. This year they anticipate earning $600 in interest and non-qualified mutual fund dividend distributions, which will be reinvested. Expense Issues Table VI.5 provides a summary of the Butterfields' fixed (non-discretionary) and variable (discretionary) expenses. Home mortgage. They are eight years into a 30-year 7.5% mortgage that had an original balance of $228,850, with a current outstanding balance of $206,602. Home equity loan. The loan balance was used to pay off credit cards and purchase a vehicle for Troy to use at college. Since the loan was first taken, they have accumulated additional credit card debt. The monthly payment is approximately 2% of the outstanding balance. The credit line expires and will be due and payable in seven years. They have paid $3,000 in interest over the past year. Auto Payments. Auto 1: Balance is $8,500 with 2.5 years remaining. Auto 2: Balance is $25,000 with 57 months remaining. Tax Issues After reviewing their pay stubs, John and Haley calculated that their total annual federal withholdings and/or estimated tax payments totaled $20,250. Their state withholdings amounted to $8,000. Social Security withheld was $10,985. The Butterfields file taxes as \"married filing jointly\" and have $30,241 in itemized deductions for the year. The Butterfields are eligible for a $5,000 state income tax deduction, and five $1,000-personal exemptions for John, Haley, and the children. The marginal tax bracket for their state is 5.75%. Specific Client Goals Under any circumstance, they want to provide 50% of the cost of Holly's and Naomi's college education costs, and all of Troy's education costs that are not covered by scholarships. They want to maintain their current standard of living in retirement or in the event of either spouse's premature death. They want to protect their income and assets in the event of a catastrophic accident or illness, so that they can pass on their assets to their children. They both want to continue funding their IRAs to the current maximum limit. See Table VI.6 for information on the Butterfields' assets and liabilities. Current Insurance Data Property and Casualty Auto. All vehicles Liability: $300,000 single limit (including uninsured motorist) Medical payments coverage: $1,000 limit per person Deductible: $250 collision; $100 comprehensive Premium: $1,100 every six months Auto 1: 20XX Honda Accord LX Sedan Mileage: 30,000 Color: light blue Engine: 6-cylinder Transmission: manual Payment: $310/month Balance: $8,500 with 2.5 years remaining Worth: $17,500 Auto 2: 20XX Toyota Sequoia Limited (44) Mileage: 5,500 Color: silver Engine: 8-cylinder Transmission: automatic Payment: $500/month Balance: $25,000 with 57 months remaining Worth: $38,000 Home. Single-family dwelling Insured value: $245,000 Replacement value: $315,000 Deductible: $500 Personal property: 50% of dwelling Bodily injury: $100,000 Personal injury: $0 Other endorsements: None Umbrella: None Professional liability: None Business: None Life and Health Life. Haley has a $50,000 universal life policy with XYZ Insurance Co. She pays the annual premium of $400. The policy has a current cash value of $3,800 (the cash value at the beginning of the period was $3,600). John is the primary beneficiary and Haley is the owner. At the time of purchase, policy projections were based on after-tax U.S. Treasury rates of 6%. John has an employer-provided term policy that pays one times his annual salary. The face amount of the policy is reduced by 50%, regardless of his salary, at age 65 and terminates at age 70. Other life assumptions: For planning purposes, the Butterfields would like to use 80% of their combined incomes, before taxes, to represent their total household expenses in the event of a death. Final illness and burial expenses are estimated to be $15,000 each. Estate administration expenses are expected to be approximately $5,200 each. Child care expenses will be $10,000. Full retirement age, for insurance purposes, is assumed to be age 67. The Butterfields need $100,000 in annual income per year, before taxes, while retired. They would like to use this assumption for both insurance and retirement planning purposes. Social Security benefit while children are still at home is $32,000 if John dies, and $29,000 if Haley dies, in today's dollars. At age 60, Haley is eligible for a $13,000 annual Social Security survivor benefit, while John is entitled to a $10,000 annual survivor benefit (in today's dollars). In the event of either spouse's death, the other spouse plans to stop working at age 60 and begin taking early retirement survivor benefits (if available). For conservative planning purposes, the Butterfields do not plan on using interest and/or dividends as an income source when planning insurance needs. At full retirement (i.e., at age 67) John will receive $18,000 per year in Social Security benefits; Haley will receive $16,500 in benefits (in today's dollars). Assumed ages at death for John and Haley are 90 and 92, respectively. The assumed gross rate of return on insurance assets, in the event of death, is 9%. Health. The Butterfields' health insurance is provided by Blue Cross/Blue Shield. The monthly premium of $600 is paid 66% by John's employer, with the remainder paid out of pocket. The plan has a deductible of $250 per person and a family copayment of 20%. The out-of-pocket per-family cap on copayments is $1,000 per year. The lifetime maximum on major medical is $500,000 per person. Long-term care. None. Disability. John's disability coverage is a group disability contract provided by his employer. It pays a $5,000 monthly benefit until age 65. The contract has a liberal \"own occupation\" definition. The elimination period is 120 days. Haley does not have a disability policy. In the event of a disability, the Butterfields would like to continue saving for other goals; however, they do not want to rely on Social Security disability benefits when estimating disability income needs. Vacation/medical leave. John has accumulated 30 sick days, which is the maximum he is allowed to carry. He could accrue one week per year if he fell below the maximum. He also is eligible for three weeks of vacation per year. He can carry over one week, but this has not previously been done. Education Funding Goals The Butterfields would like to assume that education expenses will increase 6.50% per year. They are comfortable assuming a growth rate of 9.00% per year for educational assets and savings in a taxadvantaged account before and after college begins (6.75% if assets are held in a taxable account). Each of the children is talented academically (GPA > 3.0) and in terms of extracurricular activities. Troy is currently enrolled at University of Anystate. Current cost: $14,700/year (waiver). He is on a baseball scholarship. His parents budget $5,000 per year in extra support; they pay tuition not covered in the scholarship and give Troy what is left from their $5,000 budget as a spending allowance. The Butterfields have also allocated $1,200 per year to help pay for Troy's travel expenses. He has completed one year of college. His health insurance is provided under his father's group health plan. Holly wants to attend State University; current cost: $10,500/year (possible tuition waiver). Wants to go to school on an ROTC scholarship and fund any additional expenses out of pocket from money earned during summers. Naomi's college funding goals are unknown, but her parents want to plan for college costs of $16,500 per year (in today's dollars). They prefer to use tax-advantaged savings plans to fund any expenses. Retirement Information The Butterfields would like to retire when John turns age 67. Based on today's dollars, they are willing to reduce their income by 80% of current income while retired. At full retirement (i.e., age 67) John will receive $18,000 per year in Social Security benefits; Haley will receive $16,500 in benefits (in today's dollars) at age 67. When planning, they are comfortable assuming a 9.00% rate of return before retirement, and a 5.75% return after retirement. Contributions to their defined contribution plans are anticipated to increase 3% annually. They anticipate being in a combined 25% marginal tax bracket in retirement. Inflation before and after retirement will be 3.50%; their incomes should keep pace with inflation. John's employer matches 401(k) contributions $0.50 cents on the dollar. IRA assets are held in Roth accounts. Assumed age at death for John is age 90 and age 92 for Haley. Estate Information They both have simple wills. John leaves his estate to Haley and Haley leaves her estate to John. They believe that, on average, their estate will grow by 4% after the first spouse's death. Other assumptions include: Funeral expenses are expected to be approximately $12,000 each. Estate administrative expenses will be $5,200 each. The Butterfield do not expect to pay any executor fees. Case Questions 1. Which of the following strategies can the Butterfields use to improve their cash flow situation? a. Pay off credit card balances with monetary assets. b. Decrease insurance deductibles. c. Reduce IRA contributions and use the proceeds to purchase a variable universal life insurance policy. d. All of the above. 2. The Butterfields' current ratio is (rounded): a. 0.62 b. 0.79 c. 1.68 d. 3.00 3. The Butterfields' savings ratio, using gross earned income and including employer 401(k) matching but excluding reinvested interest and dividends, is (rounded): a. 4% b. 10% c. 16% d. 22% 4. John and Haley both have retirement account balances. They would like to know what their options will be when they reach retirement. Which of the following statements describes their IRA retirement situation? I. John can roll over his 401(k) account balance into an IRA. II. Haley cannot roll over her account balance because her assets are held in a Keogh. III. Both John and Haley can roll over their account balances into an IRA and take a special five-year averaging tax technique on amounts withdrawn at that time. IV. Haley can roll over her Keogh account balance into an IRA. a. III only b. I and II only c. I and III only d. I and IV only 5. Which of the following is true if Haley closes her accounting firm to join a large consulting company this year? a. Health Insurance Portability and Accountability Act (HIPAA) rules guarantee that her new employer will immediately pay for any pre-existing conditions she might have. b. She will need to continue her current insurance coverage under COBRA provisions. c. She will be required to drop her current coverage through John's employer if she accepts insurance through her new employer. d. She can remain on John's health insurance policy until she is fully covered under her new employer's insurance plan. 6. If John, Haley, and Naomi were involved in an accident that required medical care, how much would their health insurance pay, including deductions and copayments, given the following expenses? John $1,800; Haley $3,700; Naomi $4,200. a. $1,750 b. $7,160 c. $7,950 d. $8,950 7. An HO-3 policy (Special Form) with no endorsements excludes which of the following perils? a. Flood b. Fire c. Collapse caused by a covered peril d. Weight of ice e. Volcanic eruption 8. If the Butterfields suffer a $47,000 homeowner's loss due to fire, how much will the insurance company pay on the claim, accounting for any deductible and co-pay provisions? a. $45,193 b. $45,693 c. $46,500 d. $47,000 9. The Butterfields recently lived through a major wind storm. The experts said it was not a tornado, but John and Haley would argue otherwise. Their home was terribly damaged. It has been estimated that it will cost $250,000 to fix the house. Excluding listed deductibles and copayments, how much must the Butterfields pay out of pocket toward the repairs? a. $0 b. $500 c. $5,000 d. $7,500 10. The Butterfields might be able to reduce their automobile insurance premiums by taking which of the following discounts? a. A good student discount. b. A multicar discount. c. A farm use discount. d. Both a and b 11. Which of the following statements is (are) true about the Butterfields' PAP? I. They are covered if injured while driving someone else's car. II. They are covered while driving either the Honda or Toyota. III. They are covered if they rent off-road motorcycles to tour the desert while on vacation. a. I only b. II only c. I and II only d. I, II, and III 12. During a recent thunderstorm, the Butterfields' Honda Accord received $2,300 in damage from hail. How much will their PAP pay for this claim? a. $0 b. $2,050 c. $2,200 d. $2,300 13. Haley is worried that her oldest son Troy will be without health insurance after he graduates from college in a few years. Which of the following are examples of appropriate insurance coverage recommendations for Troy once he graduates? I. Extend his current coverage through a COBRA extension. II. Purchase insurance through an offshore Asian state-sponsored high-risk pool. II. Purchase insurance through a private company. a. I only b. I and II only c. I and III only d. II and III only e. I, II, and III 14. Which of the following risk management recommendations is (are) most appropriate to help the Butterfields manage their risk exposures? I. Purchase an excess liability insurance policy. II. Decrease their homeowner's coverage to 80% of the home's value. III. Eliminate collision coverage on the Toyota. IV. Purchase an endorsement to cover their art collection. a. I and III only b. II and IV only c. II and III only d. I and IV only 15. Which of the following strategies can the Butterfields use to increase their current discretionary cash flow situation? a. Increase the deductible in their PAP policy. b. Purchase an umbrella liability insurance policy. c. Decrease the deductible in their HO policy. d. All of the above. 16. The Butterfields are not sure whether they are paying an appropriate premium for their universal life insurance policy. Which statement below is true in relation to this concern? a. The universal life policy is fairly priced according to the yearly-price-per -thousand formula. b. Even though the yearly-price-per-thousand formula states that the policy is overpriced, given Haley's health status, she should hold the policy because she probably will not qualify for another policy. c. Even though the universal policy is expensive, they should not replace it because the cost is less than two times the yearly-price-per-thousand formula benchmark price. d. Haley should replace the universal policy because, according to the yearly-price-per-thousand formula, the cost is more than two times the benchmark price. 17. Haley would like to know the difference between variable life insurance and universal life insurance. Which of the following statements most accurately describes the difference? a. Variable life insurance uses subcontracts that are invested to generate a guaranteed rate of return. b. Universal life insurance uses a fixed mortality charge, and variable life insurance does not. c. Variable life insurance has a death benefit that varies, and universal life insurance provides only a fixed death benefit. d. Universal life insurance provides a crediting rate based on the insurance company's general account subject to a minimum guarantee, and variable life insurance uses subaccounts that can fluctuate based on market returns. 18. Which of the following is an advantage for John and Haley if they decide to fund their children's college expenses using a 529 plan? a. The contribution will allow them to take a federal and state income-tax deduction, which will reduce their overall tax liability. b. If a beneficiary of the 529 plan does not use the assets, John and Haley can name a new beneficiary of the account. c. Because of the special tax structure of 529 plans, the assets held in the plan will not increase the expected family contribution for financial aid. d. All of these answers are advantages. 19. Which of the following is an advantage associated with the Butterfields' current health insurance coverage? I. John's employer pays two-thirds of the total premium, which makes the cost of the policy reasonably low. II. The deductible and co-payment associated with the policy is better than or equal to traditional health insurance policies found in the marketplace. III. The lifetime maximum benefits are sufficiently high. a. II only b. I and II only c. II and III only d. I, II and III 20. Which of the following is true for John if he purchases additional life insurance through his employer? a. Few exclusions are associated with these types of policies. b. Because most group term policies have a conversion feature, he can be assured that upon termination of employment he can continue his coverage. c. He can tailor the coverage to his own needs. d. All of the above are true. Discussion Points and Questions 1. Briefly summarize the relevant facts of the case relating to insurance planning. 2. If the Butterfields were going to purchase additional life insurance, what type of policy, what face value, and what riders would be most appropriate given their ages and needs? 3. Explain the advantages and disadvantages of having John purchase additional life insurance through his employer. 4. Describe the 80% co-insurance rule and report to the Butterfields how this rule affects their homeowners coverage. 5. What actions can the Butterfields take to reduce their insurance premiums while maintaining adequate coverage in terms of liability and property coverage? 6. Explain why the Butterfields should consider purchasing an excess liability insurance policy. 7. Describe the purpose of long-term care insurance and indicate whether and when the Butterfields should consider purchasing this type of insurance. 8. Report on the advantages and disadvantages associated with the Butterfields' current health insurance policy