Sam and Susan Scully have come to financial planner Lissa Cardenas to ask about the adequacy of their life insurance coverage.They have two children ages 4 and 2.They are each 35 years old.Sam works full-time in a management position in a manufacturing company.He earns $95,000 p.a. and does not expect further promotions, but does expect his salary will keep pace with inflation.His take home pay is $70,000 after all deductions.Susan spends much of her time as a homemaker, but she earns $15,000 p.a. in part-time jobs, which is also her take home pay.She expects she will continue to do that in the future.They plan to retire when Sam reaches age 65.

QUESTION

Sam and Susan Scully have come to financial planner Lissa Cardenas to ask about the adequacy of their life insurance coverage.They have two children ages 4 and 2.They are each 35 years old.Sam works full-time in a management position in a manufacturing company.He earns $95,000 p.a. and does not expect further promotions, but does expect his salary will keep pace with inflation.His take home pay is $70,000 after all deductions.Susan spends much of her time as a homemaker, but she earns $15,000 p.a. in part-time jobs, which is also her take home pay.She expects she will continue to do that in the future.They plan to retire when Sam reaches age 65.

They would like to continue to support the children for the first few years after high school; they are saving a small amount every year in an RESP for them.The balance in the RESP is now $10,000.They live in Wawanesa, Manitoba.They also have $40,000 in TFSAs, $10,000 in bank accounts and $4,000 in an RRSP.Sam will get a reasonably good employer pension, but Susan will get only CPP when she retires.If Sam predeceases her, she would get a top-up of CPP that would take her to the maximum CPP.They own their own home in Wawanesa, Manitoba, with a mortgage of $200,000 and an estimated market value of $400,000.They pay off the credit cards completely every month and have no other debts.Their budget is balanced, but after paying normal living expenses, the mortgage and small contributions to the RESP and $5,000 to the TFSA, they will not have money for much else.They are in excellent health and do not smoke.

Susan gets no benefits from her work, other than the mandatory employer contributions to CPP.In addition to the pension plan, Sam has good extended health care insurance and life insurance worth two times his salary, from the employer.His employer has a long-term disability plan and Sam pays the premiums for a benefit of 65% of his salary if he is unable to perform his existing job.They would have to pay $10,000 p.a. to replace the employer benefits.Sam also has a whole life insurance policy with a face value of $100,000 and a cash surrender value of $6,000.

They own only one car because Sam doesn’t need a car for his work.It is insured for $200,000 liability, collision, theft and accident, with a deductible of $100.The house is insured for $100,000.The insurance company estimates that the land is worth $80,000 of $250,000 market value.The deductible is $100.

Required:

• Estimate their requirement for additional life insurance using the income method and the expense method.Recommend how much additional insurance they need and what kind they need.Use a discount rate of 3% and assume all the expenses and income are constant.
• Analyse their other insurance needs, keeping in mind the basic risk management process.Recommend other additional insurance coverage they need or can reduce or cancel, and estimate how much they need.

• ANSWER

• Analyzing Insurance Needs for Sam and Susan Scully: A Comprehensive Financial Planning Approach

  Introduction

  In this financial planning case, we will assess the insurance needs of Sam and Susan Scully, a couple with two children. By evaluating their financial situation, income, expenses, and long-term goals, we can determine the adequacy of their existing life insurance coverage. Additionally, we will explore other insurance needs and recommend adjustments to optimize their overall risk management strategy.

  Assessing Life Insurance Needs

  To estimate the Scullys’ requirement for additional life insurance, we will employ two commonly used methods: the income method and the expense method.

   Income Method

  Under the income method, life insurance coverage aims to replace the future income of the deceased. Since Sam earns $95,000 annually, we will project his future earnings until his planned retirement at age 65, adjusted for inflation. Taking into account his take-home pay of $70,000, we can calculate the present value of the income stream using a discount rate of 3%.

  Expense Method

  The expense method assesses the family’s financial obligations and calculates the amount required to cover those expenses. This includes outstanding debts, mortgage, children’s education, and future living expenses. We will consider the mortgage balance, RESP savings, TFSA, bank accounts, RRSP, and estimated market value of their home.

  After analyzing both methods, we can recommend an appropriate level of additional life insurance coverage.

  Other Insurance Needs Analysis

  In addition to life insurance, we will analyze the Scullys’ other insurance needs to ensure comprehensive risk management. It is crucial to protect against potential financial hardships resulting from unforeseen circumstances.

  Disability Insurance

  Sam already has long-term disability coverage through his employer. However, if he were to lose this coverage, it would cost $10,000 per year to replace it (Insurance Review Questions Flashcards by Jonathon Allen | Brainscape, n.d.). We recommend evaluating the terms and conditions of this policy to ensure it adequately covers Sam’s income and expenses in the event of disability.

  Critical Illness Insurance

  Critical illness insurance provides a lump-sum payment if either Sam or Susan were to be diagnosed with a covered critical illness. Given their financial constraints, this insurance can offer valuable protection, helping cover medical costs, mortgage payments, or other expenses during recovery.

  Home Insurance

  While the Scullys’ home is insured for $100,000, the estimated market value is $400,000. It is essential to reassess their home insurance coverage to ensure it adequately covers the replacement value of the house and its contents, considering potential inflation and other factors.

   Liability Insurance

  The couple’s car insurance currently provides liability coverage of $200,000. Considering the increasing costs associated with accidents and potential lawsuits, it may be prudent to consider higher liability coverage to protect their assets adequately.

  Recommendations

  Based on the assessment of the Scullys’ insurance needs, we recommend the following:

   Additional Life Insurance

  Taking into account the income and expense methods, it is advisable for Sam and Susan to acquire additional life insurance coverage (Beattie, 2023). Considering their financial goals, outstanding debts, and children’s education expenses, a recommended amount of coverage can be determined.

  Disability and Critical Illness Insurance

  Evaluate the terms and coverage of Sam’s existing long-term disability plan to ensure it aligns with his income and expenses adequately (Li et al., 2019). Additionally, consider acquiring critical illness insurance to mitigate the financial impact of a severe illness.

  Home Insurance

  Reassess their home insurance coverage to ensure it adequately reflects the replacement value of the property, considering market trends and inflation.

  Liability Insurance

  Consider increasing the liability coverage on their car insurance policy to protect their assets adequately in the event of an accident or lawsuit.

  Conclusion

  By evaluating the Scullys’ financial situation, goals, and risk management needs, we can recommend the appropriate insurance coverage to provide them with peace of mind and financial protection. Additional life insurance, disability insurance, critical illness insurance, and adjusted home and liability coverage can help safeguard their family’s financial well-being in the face of unexpected events. Remember to consult with a qualified insurance professional to obtain personalized advice tailored to the Scullys’ specific circumstances and needs.

  References

  Beattie, A. (2023). How Much Life Insurance Should You Have? Investopedia. https://www.investopedia.com/articles/pf/06/insureneeds.asp 

  Insurance Review Questions Flashcards by Jonathon Allen | Brainscape. (n.d.). https://www.brainscape.com/flashcards/insurance-review-questions-7613732/packs/12514845

  Li, A., Shi, Y., Yang, X., & Wang, Z. (2019). Effect of Critical Illness Insurance on Household Catastrophic Health Expenditure: The Latest Evidence from the National Health Service Survey in China. International Journal of Environmental Research and Public Health, 16(24), 5086. https://doi.org/10.3390/ijerph16245086