This is a comprehensive case, which covers all you have learned regarding insurance planning. As with American many families, the Berrys have ambitious financial goals but lack the financial savvy to achieve them. They have sought advice from you,the financial planner, to assist them in achieving their goals. The family has many needs and it is your task to assist them in prioritizing and identifying strategies to meet these needs and their goals. Addressing their insurance needs is your main focus, however, you will find it difficult to address insurance needs without taking the other needs into consideration. In addition to insurance planning, feel free to elaborate on other financial planning issues you deem important.

Action Items

Use the attached Berry case as the basis for this comprehensive case.

Life Coverage:

Based on the capital needs approach, evaluate the adequacy of Rasp's life insurance coverage amount if he were to die today. Make sure to convert the amount of capital needed today to provide the future stream of income to an equivalent present value amount. Is Rasp adequately covered? If not, what are your insurance recommendations?

Disability Coverage:

A short term or long-term disability due to illness or injury can devastate your financial plans. At a time when you can no longer work for a living, your expenses may actually increase while your income decreases, forcing you to deplete funds that were accumulating for your financial independence in your retirement years. Thus, careful planning should be made to assure that you have adequate coverage in the event of disability.

Calculate the income needed and the income available when the following two situations occur:

(a) if Rasp becomes disabled and (b) if Holly becomes disabled.

Answer this question: Is there a shortage in their disability coverage?

Long-term Care:

Calculate the total potential long-term care costs in today's dollars for the Berrys. Factors you should consider in this long-term care analysis include:

estimation of monthly care cost,

number of months of care needed,

assumed inflation rate,

years until long-term care starts, etc.

ATTACHMENT PREVIEW

Download attachment

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Today is January 1, 2013

INTRODUCTORY DATA

THE FAMILY

Rasp and Holly Berry are both 36 years old. They married in 2011 and he adopted her two children, Blue and

Black. They have three additional children of their own, Cherry, Currant, and Dew.

Four of the five children are happy and healthy. Blue is 5 years old, Black is 3 years old, Cherry and Currant

are one-year old twins and Dew was just born. Blue has a significant learning disability, but he is still expected

to attend and complete college.

Both Rasp and Holly's parents are living and 65 years old. Rasp and Holly have no expectations of any

inheritance from either couple. Fortunately, it looks like each set of parents is self-sufficient.

Rasp is a regional manager with a hotel chain and makes an annual salary of $180,000 with a bonus of $20,000.

Holly is a drug counselor, who makes $50,000 annually.

FINANCIAL GOALS & CONCERNS

To retire at age 62 with $200,000 in income in today's dollars.

To decide what to do with their condo. They are horrified that it will bankrupt them.

To make sure they have an adequate insurance portfolio.

To make sure they have an appropriate investment portfolio for their financial situation.

To provide college education at the state university for each child for 4 years.

They want you to make a detailed cash flow analysis to determine where they are relative to bankruptcy.

EXTERNAL INFORMATION

ECONOMIC INFORMATION

CPI inflation is expected to be 3%.

Education inflation is expected to be 5%.

The economy is expanding slowly.

BANK LENDING RATES

15-year conforming annual rate mortgages are 3.50%.

30-year conforming rate mortgages are 4.0%.

Any closing costs associated with mortgage refinance are an additional 3% of the amount

mortgaged and will be included in the mortgage or paid directly.

Mr. Berry (65)

Mrs. Berry (65)

Mr. Bush (65)

Mrs. Bush (65)

Rasp (36)

Holly (36)

Blue (5)

(adopted by Rasp)

Black (3)

(adopted by Rasp)

Cherry (1)

Currant (1)

Dew (0)

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2

INVESTMENT RETURN EXPECTATIONS

The Berry's expected / required rate of return on all investments is 8.5%.

Return

Standard

Deviation

Cash and Money Market Fund

2.5%

2.0%

Treasury Bonds / Bond Funds

4.0%

4.0%

Corporate Bonds / Bond Funds

6.0%

5.0%

International Bond Funds

7.0%

6.0%

Index Fund

9.0%

14.0%

Large Cap Funds/Stocks

10.0%

16.0%

Mid/Small Funds/Stocks

12.0%

18.0%

International Stock Funds

13.0%

22.0%

Real Estate Funds

8.0%

12.0%

INTERNAL INFORMATION

FINANCIAL STATEMENTS

Statement of Financial Position

Statement of Financial Position

Rasp and Holly Berry

Balance Sheet as of 12/31/12

(and

1/1/2013)

ASSETS

1

LIABILITIES AND NET WORTH

Current Assets

JT

Cash & Checking

$15,000

JT

Money

Market

$25,000

Total Current Assets

$40,000

Investment

Assets

H

Retirement

$0

H

Non-retirement

$0

JT

Condo

$900,000

$900,000

Total Investment Assets

Personal Use Assets

JT

Principal

Residence

$500,000

JT

Furniture,

Clothing

$100,000

H

Car #

1

$20,000

W

Car # 2

$20

,00

0

Total Personal

Use Assets

$640,000

Total Assets

$1,580,000

Current Liabilities

2

W

Credit Cards

$10,000

Total Current Liabilities

$10,000

Long-Term

Liabilities

2

JT

Principal Residence

$540,000

JT

Condo Mortgage

$400,000

JT

Automobiles

$38,000

Total Long-Term

Liabilities

$978,000

Total Liabilities

$988,000

Total Net Worth

$592,000

Total Liabilities

& Net Worth

$1,580,000

1.

Assets are stated at fair market value.

2.

Liabilities are stated at principal only as of December 31, 2012 before January 2013 payments.

H = Husband

W = Wife

JT = Joint

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Show entire document 3

Income Statement

Rasp and Holly Berry

Statement of Income and Expenses

Expected For This Year (2013)

Cash Inflows

Total

Rasp's Salary

$180,000

Rasp's Bonuses

$20,000

Holly's Salary

$50,000

Total Cash Inflows

$250,000

Cash Outflows

Savings

Rasp's 401(k)

$17,000

Holly's 401(k)

$17,000

Outside of retirement plan savings

0

Total Savings

$34,000

Taxes

Rasp's Federal Income Taxes Withheld

$36,000

Holly's Federal Income Taxes Withheld

$9,000

Rasp's Social Security Taxes

$9,720

Holly's Social Security Taxes

$3,825

Property Tax - Residence

$10,000

ND

Property Tax - Condo

$10,800

ND

Total Taxes

$79,345

Debt Payments (Principal & Interest)

Principal Residence Mortgage

$38,851

ND

Condo Mortgage Payment

$44,949

ND

Credit Cards

$3,500

ND

Auto Payment

$6,500

ND

Total Debt Payments

$93,800

Living Expenses

Utilities Principal Residence

$6,000

ND

Gasoline for Autos

$2,400

ND

Lawn Service

$1,800

ND

Entertainment

$10,000

Vacations

$10,000

Church Donations

$1,800

ND

Clothing

$5,000

ND

Auto Maintenance

$2,000

ND

Satellite TV

$1,200

ND

Food

$8,000

ND

Utilities - Condo

$3,600

ND

Private School Education Family Rate

$15,000

ND

Total Living Expenses

$66,800

Insurance Payments

Health Insurance

$9,600

ND

HO Insurance Principal Residence

$10,000

ND

HO Insurance - Condo

$12,000

ND

Auto Insurance Premiums

$5,000

ND

Condo Association Fees

$12,000

ND

Total Insurance Payments

$48,600

Total Cash Outflows

$322,545

Net Discretionary Cash Flows (Annual)

($72,545)

ND = Non-Discretionary cash flows per mutual understanding between financial planner and client.

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4

INSURANCE INFORMATION

Life Insurance

Rasp has $50,000 of employer provided group-term life insurance policy.

Holly is the beneficiary. Holly has

$50,000 of employer-provided group term life insurance; Rasp is the beneficiary.

Health Insurance

They are all covered under Rasp's employer plan, which is a POS plan with co-pays of $25, no deductible in

network and a maximum out-of-pocket annual limit of $2,500. The maximum lifetime benefit per person is

unlimited. The monthly premium is $800.

Disability Insurance

Both, Rasp, and Holly have disability policies provided by their respective employers that provide 65% of gross

pay with an elimination period of 90 days. The policies are guaranteed renewable and define disability for any

occupation for which they are educated, trained, or experienced. The policies cover both sickness and accidents.

Long-Term Care Insurance

The Berry's do not have long-term care insurance at this time.

Homeowners Insurance

Automobile Insurance

They have 2 cars, both covered by XYZ Auto Insurance for 100/300/50 and uninsured motorist, cash value for

property, and $1,000 deductible each. The annual premium is $5,000.

PLUP

They have no personal liability umbrella policy.

Special Needs ILIT Trust

They want to set up a special needs trust funded with a second-to-die life insurance policy. The beneficiary of

the trust will be Blue. They will fund the trust with $12,000 per year until they retire to fund a $1,000,000

permanent insurance policy.

Personal Residence - HO 3 plus endorsements

A very high quality policy

Condo - HO 6 plus endorsements

A very high quality policy

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5

INVESTMENT INFORMATION

Risk Tolerance Questionnaire

Global Portfolio Allocation Scoring System (PASS) for Individual Investors

1

Questions

Strongly

Agree

Agree

Neutral

Disagree

Strongly

Disagree

1. Earning a

high long-term

total

return that will allow my capital to

grow faster than the inflation rate

is one of my most important

investment objectives

.

R, H

2. I would like an investment that

provides me with an opportunity to

defer taxation of capital gains to

future years.

R, H

3. I do not require a high level of

current

income

from

my

investments

R, H

4. I am willing to tolerate some

sharp down swings in the return on

my investments in order to seek a

potentially higher return than

would normally be expected from

more stable investments.

R

H

5. I am willing to risk a short-term

loss in return for a potentially

higher long-run rate of return.

R

H

6. I am financially able to accept a

low level of liquidity in my

investment portfolio.

R,H

R= Rasp, H= Holly

OTHER INFORMATION REGARDING ASSETS AND LIABILITIES

Automobiles

They purchased new cars at $20,000 each plus $625 of taxes.

They pay $6,500 per year with zero interest.

They will pay for approximately 6.25 years.

Personal Residence

They bought the house in Slidell, Louisiana in July 2011 for $600,000 with a 30 year mortgage for $540,000 at

6% with no principal payment until 2013 when they start 30-year payments of $3,237.57 (P & I) monthly. The

value of the house in Slidell has fallen to $500,000 due to market conditions.

Condo

Rasp inherited a French Quarter condo in New Orleans from his Uncle BJ after Hurricane Katrina, in January

2006.

The fair market value at Uncle BJ's death was $600,000. Rasp lived there by himself until 2011 when he

married Holly. After they married, they decided to renovate the condo and borrowed $400,000 at 9% for 20 years

to do a first-class job of upgrading the condo. The terms of the loan included interest only for the first two years

then amortized over 18 years. They were thinking that they could sell it for over $1,000,000, but they have little

knowledge of accounting, finance, or real estate.

In January 2011, Rasp transferred a interest in the condo to Holly as a gift. They moved to Slidell, Louisiana in

July 2011.

1.Global Portfolio Allocation Scoring System (PASS) for Individual Investors - developed by Dr. William Droms (Georgetown University)

and Steven N. Strauss (DromsStrauss Advisors Inc.) - model used with permission.

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6

Annual Cash Flows and Valuation Information for French Quarter Condo

Year

FMV

Value

Mortgage

Pmt.

Taxes

Insurance

Condo fee

Renovation

2006

$150,000

0

$1,800

$2,000

$6,000

2007

$600,000

0

$3,000

$3,000

$7,000

2008

$500,000

0

$4,000

$3,000

$8,000

2009

$400,000

0

$5,000

$5,000

$9,000

2010

$450,000

0

$8,000

$8,000

$10,000

2011

$800,000

0

$

10,000

$10,000

$11,000

$400,000

2012

$900,000

**

$10,800

$12,000

$12,000

**To be calculated

Rasp and Holly provided you with the following information about the condo:

1.

They believe the appraisal they have for the condo of $900,000 is correct even though nothing is selling.

The market has not moved in more than two years.

2.

They have a firm cash offer of $600,000 to sell the condo now.

3.

On a sale they would pay 6% commission.

4.

They can rent the property for two weeks at Christmas, Sugar Bowl, and New Years for $20,000 gross less

a 25% rental fee.

5.

They could rent by the week and the realtor told them they could get about 100 rental days a year at $500

Per day less a rental fee of 25%. Alternatively, they think they could rent it themselves for $400 per day for

80 days. If they did this, they would plan to use the property about 60 days a year personally.

6.

They could rent it out on a year's lease for $4,000 a month less a 10% rental fee.

7.

If they rent it out less than a year, they would pay all of the utilities.

Other Information on the Condo

Mortgage - $400,000 at 9% for 18 years beginning January 1, 2013

Taxes - $10,800 annually

Insurance - $12,000 annually (stays the same if rented)

Condo Association Fees - $12,000 annually

Utilities - $300 per month

Any depreciation is over 20 years (special go zone rate) on the adjusted taxable basis of $550,000 (land

value is zero).

The family moved to Slidell, Louisiana, an hour away from the French Quarter, for Rasp's work in July 2011.

They continued to use the condo as a vacation home and go there about 20 weekends a year for various festivals

and shopping. The condo is up for sale, but the market is soft and it has not sold.

Condo Concerns

They have heard there are various tax benefits to renting and selling their condo property but are not certain that

they know enough to make a decision. They want you to explain all of the cash flow and tax implications of each

of their alternatives and help them make a decision as to what they should do with the condo in the French

Quarter. They also want to include any refinance alternatives. They are very concerned at the prospect of negative

cash flows, thinking that if they do not do something they may be forced into foreclosure or bankruptcy.

MORTGAGE MARKET CONDITIONS

Current interest rates are 3.5% for 15 years conforming rate mortgages and 4.0% for 30 years conforming rate

mortgages. However, borrowers must meet strict 80% loan to value requirements and must meet housing ratios of

28% and all debt ratios of 36% of gross income.

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7

EDUCATION

The cost of in state college education is $17,000 per year in today's dollars. The Berry's have the five-year old

and the three-year old in private school and pay $15,000 per year for the family rate no matter how many children

in excess of 2 go to school. Therefore they expect this cost to be with them for the next 17 - 18 years. The Berry's

want you to include Blue in any education analysis because he may use resources equal to or even greater than the

other children for his education.

RETIREMENT INFORMATION

They would like to retire at age 62 with annual income of $200,000 in today's dollars. Their life expectancy is

assumed to be to age 95. They expect to earn 8.5% on investments and they expect $50,000 (total for both

of

them) in today's dollars for Social Security at normal retirement age at age 67. While they have made no

contributions to date, they each expect to contribute $17,000 in this next year to their respective 401(k) plans. He

has no employer match but her employer match is 4%.

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