Chapter 15: Insurance Income Protection, Health and General

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1 Case Studies with Guided Answers by Sharon Taylor 2013 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher. Chapter 15: Insurance Income Protection, Health and General CASE STUDY 15.1 Phil and Susan Face the Consequences of Premature Death Phil Clancy, 54, is an electrician. For the past 10 years, he has successfully operated his own business. Phil s income from the business is $300,000 per year. Phil s wife, Susan, is 38 and was a banking adviser for 10 years. There are two children: Julie, aged nine, and Peter, aged 11. It is Phil s and Susan s desire that their children have the opportunity to go to university. To provide for this, they estimate that $60,000 should be set aside. The children would be dependent until they turn 25. Susan s mother, Lyn, is living with the family. She is 66 and receives a small pension that covers her incidental expenses. Phil and Susan meet her other expenses, which amount to $300 per month. The family s basic living expenses are $2,000 per month. In addition, for each family member (including parents) this will increase by $500 per person. The Clancys own their own house which has a value of $550,000 and a mortgage of $200,000. Credit cards and personal loans amount to $25,000. It has been agreed that, in the event of Susan s death, Phil s income will be sufficient to meet the family s needs, though debts would need to be paid out and other lump sum amounts met. The life expectancy is to be taken as 80 for males and 85 for females. There is a self-funded superannuation plan which will provide sufficient income from age 65 for either or both the Clancys. There is in force a policy on Phil s life for $250,000 and none on Susan s. Funeral and associated costs are expected to amount to $10,000, and final medical expenses will amount to $25,000. Legal and estate costs are anticipated to be $5,000. Additionally, they believe they need emergency funds of $20,000. From the information provided, calculate the amount of cover necessary if separate life covers were to be effected for Phil and Susan. Financial Planning in Australia 5e Case Studies Ch15 Page 1

2 One-off expenses $ Mortgage 200,000 Credit cards 25,000 Education 60,000 Funeral 10,000 Medical 25,000 Legal 5,000 Emergency 20,000 Total 345,000 Dependant calculations if Phil dies $ Family living 2, ,000 Additional living Susan ,000 2 children , ,000 Lyn ,400 1,058,400 + one-off 345,000 1,403,400 Minus existing cover 250,000 1,153,400 Approx cover $1.15 million If Susan dies $345,000 Hence, approximate cover $350,000 Payout one-off expenses. No other cover needed as Phil s income should be sufficient to maintain the family. Financial Planning in Australia 5e Case Studies Ch15 Page 2

3 Case Study 15.2 Melissa Reviews Her Risks Melissa, aged 40, is a single parent. Melissa has run her own financial planning practice for the last 10 years. She divorced five years ago and has sole custody of her two daughters, Eileen aged eight and Maxine aged six. Both attend private schools. Melissa currently earns a wage of $450,000 from her business and the additional costs are listed below: Wages $300,000 (four employees) Rent $60,000 Insurance $15,000 Consumables $15,000 Utilities $8,000 Marketing $5,000 Research costs $6,000 Telephone $4,000 Melissa is the only financial planner in the business. She employs two para-planners who are each paid $80,000 pa; a client services manager paid $100,000; and a receptionist paid $40,000. Additionally, she purchased a home in Brisbane recently for $500,000 and this is mortgaged to the extent of $300,000. Her other debt amounts to $50,000 on two credit cards. She owns a Lexus sedan valued at $50,000. In respect of the children, Melissa employs a live-in nanny at a cost of $85,000 per annum. This is especially necessary since Maxine was recently diagnosed as suffering from severe autism. It is anticipated that she will require extensive therapy with costs amounting to $35,000 per annum. The duration of the therapy is unknown at this time. Given this recent development in her life, Melissa decided she needs to undertake a review of all her risks. At present, she has insurance cover as follows: Financial Planning in Australia 5e Case Studies Ch15 Page 3

4 Insurance type Value of cover Professional indemnity $500,000 Building and contents $530,000 Comprehensive car $50,000 Private health insurance 1 Complete a risk analysis, identifying for Melissa the risks for herself, the family and the business. 2 Suggest strategies to mitigate against the identified risks. 1 Risks faced: inability to service debt; limited information re health etc; risk that the practice fails, hence no income; risk of professional negligence; illness for Melissa or children; risk of the premature death of a client; disablement and not being able to work (her) or inability to care for children (her); terminal or critical illness; business overhead risk; insufficient superannuation at age 50; loss of income due to sickness; damage to or loss of motor vehicles. 2 Possible strategies: regular health checks and healthy lifestyle; life insurance; TPD insurance; trauma cover; business overhead cover; income protection insurance; increase savings to superannuation salary sacrifice. Financial Planning in Australia 5e Case Studies Ch15 Page 4

5 Needs covered for: mortgage; living expenses; education costs; funeral expenses; housekeeper costs; pay out debt. Financial Planning in Australia 5e Case Studies Ch15 Page 5