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 Answer

Proposal for Life and Disability Insurance for Bill and Kathy Collins

Introduction

Bill and Kathy Collins are a young professional couple who are looking to protect their financial future. They have a number of assets, including a home, investments, and a line of credit. However, they do not have any life insurance or disability insurance.

Full Answer Section

Why They Need Insurance

There are a number of reasons why Bill and Kathy should consider getting life insurance and disability insurance. First, they have a young child and they want to make sure that their child is financially secure if something happens to them. Second, they have a mortgage and they want to make sure that their mortgage is paid off if one of them becomes disabled. Third, they have a number of investments and they want to make sure that their investments are protected if one of them dies.

Types of Insurance

There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period of time, such as 20 or 30 years. Permanent life insurance provides coverage for your entire life and also includes a savings component.

There are also two main types of disability insurance: short-term disability insurance and long-term disability insurance. Short-term disability insurance covers you for a short period of time, such as six months or a year. Long-term disability insurance covers you for a longer period of time, such as five years or more.

Amount of Coverage

The amount of life insurance that Bill and Kathy need depends on a number of factors, including their income, their expenses, and their financial goals. A good rule of thumb is to get enough life insurance to replace your income for at least 10 years.

The amount of disability insurance that Bill and Kathy need depends on their income and their expenses. A good rule of thumb is to get enough disability insurance to cover your essential expenses, such as your mortgage, your car payment, and your food expenses.

Government Plans and Benefits

There are a number of government plans and benefits that Bill and Kathy may be eligible for, such as the Canada Pension Plan (CPP) and the Old Age Security (OAS) program. However, these plans and benefits may not be enough to cover their financial needs.

Existing Coverage

Bill has some life insurance through his employer, but Kathy does not have any life insurance. Bill also has some short-term disability insurance through his employer, but Kathy does not have any disability insurance.

Recommendation

I recommend that Bill and Kathy get the following types of insurance:

Life insurance: I recommend that Bill and Kathy get term life insurance for at least 10 years. The amount of coverage should be enough to replace their income for at least 10 years.
Disability insurance: I recommend that Bill and Kathy get long-term disability insurance. The amount of coverage should be enough to cover their essential expenses.

Conclusion

I believe that getting life insurance and disability insurance is a wise decision for Bill and Kathy. These policies will help to protect their financial future and ensure that their loved ones are taken care of if something happens to them.

Additional Considerations

In addition to life insurance and disability insurance, Bill and Kathy may also want to consider getting other types of insurance, such as critical illness insurance and long-term care insurance. Critical illness insurance can help to pay for the cost of treatment if you are diagnosed with a critical illness, such as cancer or heart disease. Long-term care insurance can help to pay for the cost of long-term care, such as a nursing home, if you become disabled and need care.

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