Question 6

Mr. and Mrs. Grass are asking you to evaluate their life insurance needs. Mr. is 28 and Mrs. is 24. To date, they have not made any investments, preferring to give priority to paying their debts. They own a house with an uninsured mortgage of $85,000, which will be $35,000 in 5 years. They have a car, furniture and everything else they think they need. They give you the following information:

- The Gazon couple has adopted a child who is now 1 year old. The couple's desire is to receive insurance income for 20 years if they die at age 28 or 15 years if they die at age 33.

The couple's current cost of living is (16% * MAT) per year, which includes the annual mortgage cost of $11,600 and child-related expenses. If either spouse were to die, the annual provision for special projects is estimated at $2,000. The annual government benefit is $3,000 upon the death of either spouse.

No special funds are provided for Mr. Smith's death, but Mrs. Smith suggests an education fund of $20,000 for the child at the two ages of analysis corresponding to her own death.

Mrs. Smith's gross annual salary is $34,000 and Mr. Smith's is $14,000 per year.

The disbursements attributable to the death of one of the spouses would be $6,000 after receipt of the death benefit from the government. No adjustment should be made for the cost of living at death. Mr. Smith's whole life insurance is $50,000 and Mrs. Smith has a 10-year term life insurance policy of $150,000. The future inflation rate is 6%. The return on future investments is estimated at 10%, before taxes. Tax rates of 30% are assumed for all calculations.

Required

a) Calculate the amount of capital required at death for Mr. and Mrs. Lawn for each of the two respective ages.

b. Calculate the missing life insurance amounts for Mr. Groom and Mrs. Groom for each of the two respective ages.

c) What insurance products would you recommend?

Presumed date of death
number of years of coverage
Cost of living before death
+annual project allowance
-mortgage payment
-deceased spouse's portion
Net cost of living after death
-non-taxable income
child allowance
income to be made up
-surviving spouse's income
Surviving spouse's pension
net salary
income shortfall to maintain cost of living
capital required for income shortfall
+ release capital
final disbursement
Debts at death
taxes payable at death
+ special funds
Capital needed at death