Question 6

Part a) John has come to you as his financial advisor to get advice about the level of life cover he needs. He is married with two children and his current annual income is $95,000. He is 41 years old. The current interest rate is 3.5% per annum. Calculate the appropriate level of cover using the multiple approach.

[5 marks]

Part b) Michael Petersons 5-year old property was recently destroyed in a house fire. Luckily, Michael had a home and contents insurance policy on the property. The house was originally constructed on land that Michael owned due to an inheritance. The construction costs at the time he built the house were $315,000 and he spent $50,000 on various appliances, furniture and fixtures and fittings for the home (home contents). The current construction costs for a similar home would be $405,000 and the cost of replacing the home contents would be $75,000. The market value of the home contents at the time of the fire was $22,000.

Calculate the total value of the insurance claim to be made by Michael if the home and contents policy was a replacement value policy.

[5 marks]

Part c) Explain the difference between a replacement value home and contents insurance policy and an indemnity value home and contents insurance policy.