Risk Management and Insurance Planning
Case Study Facts
Bill and Kathy Collins are a professional couple: both are aged 32. Bill is employed at a smallfamily run business as a mechanic, while Kathy is self-employed as an architect. Both aresocial drinkers, and Bill is a regular cigarette smoker. Both infrequently smoke legal cannabis.Bill’s group benefits through his employer include the following:• $100,000 life insurance• $50,000 spousal life insurance coverage• $500/ week short term disability plan that covers him for six months• Up to $1000 dental and $1000 eyecare annually, with no deductibles or limitationsKathy has no coverage of her own since she has had little time to think about possibleinsurance coverages.Instead, they have worked to buy a home, pay down the mortgage and invest in RRSPs andTFSAs. Why might they want insurance?They own a home worth approximately $800,000, and their diligent prepayments have helpedto reduce the mortgage to a very manageable $350,000. The mortgage was renewed last monthat 3.5% with a 25-year amortization and monthly payments. Their RRSPs total just under$250,000 and they have $87,000 in their TFSAs. Assuming no return on both investmentaccounts.Their joint bank balance is a reserve fund with a normal balance of about $5,000. Last yearBill earned gross income of $107,500 and Kathy’s gross income was $143,000. She incurred$23,000 in expenses, $4,000 of which more closely related to lifestyle choices than businessexpenses.They have a line of credit with a current balance of $20,000: it was used to landscape andupdate their backyard during the pandemic. Generally, they use their credit card to covermonthly living expenses, paying off the total balance as it comes due. The average monthlybill is $3,500.Bill’s family history includes some heart disease later in life- Bill ascribes that to diet, and forthat reason has adopted a low carb/ keto diet plan. Kathy’s mother has diabetes and high bloodpressure, and her grandfather developed Alzheimer’s late in life.Recreationally, Bill loves to ride his motorcycle and they both enjoy scuba diving. They arethinking that they are now relatively settled, and it’s time to begin a family. They are thinking about their life insurance needs
Your Task
You are a financial advisor and Bill and Kathy Collins have come to your office looking foryour guidance on their on disability and life insurance needs.
• Prepare a proposal as to why they might need insurance, and specifically what types ofinsurance and at what amounts.
• Be sure to show why your recommendation makes mostfinancial sense.
• Consider the following in your proposal:
• Income replacementDisability coverageEducation and mortgage needsWhole life, universal life, term coverage or a blend?
• Government plans and benefits
• Existing coveragesAny other concerns you believe relevant.
• Amount of CoverageYou need to present a reasonable, intelligent recommendation to them.
• Ensure that you reflectappropriate financial calculations and considerations.
Sample Solution
Proposal for Life and Disability Insurance for Bill and Kathy Collins Introduction Bill and Kathy Collins are a young couple who are looking to start a family. They are both healthy and financially stable, but they recognize that they need to protect their financial future in case of an unexpected event. Current Situation Bill is employed at a small family-run business as a mechanic. He earns a gross income of $107,500 per year. Kathy is self-employed as an architect. She earns a gross income of $143,000 per year.Full Answer Section
The Collins own a home worth $800,000. They have a mortgage of $350,000 with an amortization period of 25 years. They also have $250,000 in RRSPs and $87,000 in TFSAs. Bill has a group life insurance policy through his employer. The policy provides $100,000 of coverage for Bill and $50,000 of coverage for Kathy. Kathy has no life insurance of her own. Proposal I recommend that Bill and Kathy purchase the following life and disability insurance policies:- Life insurance: I recommend that Bill and Kathy purchase $1 million of term life insurance for each of them. This will provide enough coverage to replace their income and pay off their mortgage in the event of their death.
- Disability insurance: I recommend that Bill and Kathy purchase $5,000 per month of disability insurance for each of them. This will provide them with income if they become disabled and unable to work.