You work in a financial planning practice.

Tony and Amanda Hutchinson have come to you seeking some insurance advice. Tony works as a violinist and violin teacher. He has recently quit his job at a music shop to start his own business. When he quit his job, all of Tonys work-based insurance policies ceased. In his new business, 50% of his work will come through private violin tuition where he will have students learn at his home. The other half of the business will earn money through performances at concerts and weddings at the weekend. Tony believes that his business will earn him about $60,000 p.a. after tax. He has purchased a $180,000 violin for his performances using a $160,000 loan. Amanda works as a consultant on transportation modeling for a private company. She is often required to attend highway repairs in person. She earns $95,000 p.a. after tax.

Details of Tony and Amandas situation are as follows. Tony is aged 35 years old and his wife Amanda is aged 37 years old. They expect to work until they are 65 years old. They have one child called Sophie who is 3 years old. Should they pass away, they will need to support her until she is 22 years old. If one should die, they anticipate the other would cease work for a while. However, they anticipate that they could return to work three years after one of them passed away but only work 3 days out of 5 per week.

They have purchased a condo for $750,000 and have a $400,000 mortgage. Their house contents (TV, fridge, air conditioner, etc.) are valued at $135,000. They have two cars valued at $12,000 each. In the event of the death of one spouse, they would sell one car. Their investments consist of $30,000 in a TFSA for Tony, $35,000 in a TFSA for Amanda. Tony nominated Amanda as his beneficiary on his TFSA and Amanda has made her beneficiary the estate created by her will. Currently, they have $8,000 in a chequing bank account and no other investments. They sold all other investments to purchase their condo 1 year ago but think they should save for retirement soon.

Their mortgage costs $1,700 per month and their monthly living expenses in addition to this are $2,800. Both Amanda and Tony do not smoke and have no serious health conditions. Tony has found his back has been getting painful recently, but Amanda gives him a massage at night to fix it. They both expect to work until they are 65 years old. Amandas work provides a 10-year term life insurance which she started 3 years ago. This insurance will pay her beneficiary $200,000 if she should pass away.

Assume the after-tax real rate of return is 3%.

Required:

1) Calculate the life insurance requirement for Tony and Amanda using the income approach.

2) Identify 8 pertinent risks they face, explain the issue with the risk and then classify the severity and frequency of each, and suggest ways to control or reduce the risks you identified.