Case Study on Insurance Calculation of Married Couple Free Solution

Question: Explain the calculation of the insurance of the married couple Stephan and Dalgar. Answer: Introduction of Case Study- Young Married Couple Stephan and Dalgar are having one child. One of the business associate of Stephan was seriously injured in an accident so there was uncertainty of his coming back to work. The injured john family was at a financial risk because of lack of insurance. Explanation- They do not have enough insurance cover. Marie asked Stephan to give a call to john so that he can help him in the same. Thus, on phone, you explained the couple about the financial planning and to disclose certain financial information. You assured them that information will be kept confidential. There is a need for completing the financial profile. It is necessary to disclose what they own, owe and what they earn. This information will be recorded in the fact finder form. You arranged a meeting with them to come to your office along with the financial information such as, the details of income, the details of insurance, expenses, superannuation and the investments. Stephan and Marie arrived at the office and you explained them the FSG. Stephan is of 36 years old and his wife is of 32 years. Marie is the weekend player and they have one son harry of 12 months old. Purchase home 3 years back $675,000 Mortgage $440,000 Rate of interest on mortgage 5.48% Mortgage repayment $2,920 Current amount for offset $32,000 Stephan is a chemical engineer working on a full time basis in a agricultural supplies company. For ten years, he has earned $ 145000 pa. Marie worked on a part time basis following the leave for maternity. Child care fee of $88 per day is received by Marie. Marie and Stephan decided to send harry to a local school at a cost $65000. Cash with bank and super annuation , Marie and Stephan has two cars worth $ 11000 and $33000 each. It is clear from the above that they have one son, and to secure the future of their son, they need to go for the insurance. They have the total income $ 145000+ 88+65000+ 33000 = 189088 Conclusion- A file note containing the clients name shall be made. A promise is written to Marie and Stephan containing the FSG and the checklist of the information. Collection of the data- All the relevant information is collected from the John and Marie in order to provide them an insurance policy. Calculation of superannuation- Date of joining Particulars $ 1/2/2004 Stephan Super annuation fund 260000 19/1/2004 Marie Super annuation fund 114000 In the above case, superannuation fund stands as a deduction while calculating the tax. Total amount of $ 374000 shall stand on exemption of tax Calculation of Insurance- Super annuation fund provides death and permanent disability benefits. The premium is $ 0.90 p.a. for the cover of $1000. This premium is deducted from the superannuation contributions. In a ASSF super fund, it increases the benefits twice that of the members annual salary. There is increase in the cover to $ 750000 with the help of this fund. There will be increase in the premium to $1.00 per $ 1000 which is twice that of members annual salary. It has provided the protection to income with a coverage of 30 to 90 days. The benefit period will be between the range 2 years to 65 years. Maries superannuation fund is providing TPD benefits of $ 120000. The premium is $ 143 pa. This premium is deducted from the superannuation contributions. The scale of premium is as follows- For every $ 500000, it is $ 1.19 pa and $ 1000 of cover. For between 500001 to 1 million, it is $ 1.45 pa and with a cover of $ 1000 For between 1 million to 2 million, it is $ 1.65 pa and with a cover of $ 1000 Section 1- Maries and Stephens only objectives are to provide for their son harry and to protect the house. For them, the life insurance policy and the House insurance policy is sufficient. This will help to provide fund after the death of the parents and to protect the house. As, the cost of the house is 675000 $, insurance policy of $ 800000 is sufficient and the life insurance policy shall be of worth $ 250000. SOA- Risk Management Strategies Types of Insurance Reasons Protection of House General Insurance This will protect the house from thedamage through fire Take care of their son Life Insurance Take care of their son even after their death. Section 2- The Fact Finder- Risk Assignment Stephan Marie Repayment of Mortgage High High Health Issue High Low Fluctuation in Income Low High Section 3- Analysing the Data Section 3 Part A- Review of the Fact Finder- It shall include the details of the need, objectives of Marie and Stephan to go for insurance. Current Position- Their current position shows that they are looking for the protection of their house and the care to be taken of their son Harry Debt Management- They are having enough money to pay off the mortgage debt on the house. Risk / Protection- The risk involved is with regards to the health of Stephan who is a smoker and it can be protected with the help of medical insurance. Present and Future taxation issues- The taxation benefits is available to both the couples on their super annuation fund. The needs of the couples is to preserve the assets which is for the short term. This is from the two main objectives of the Dalmar. The value in dollar is $ 440000. Another objective of the couple is the protection of the income. This will help the Dalmar in maintaining his life if either of them dies. It is for the short term. Value in dollar will be the salary upto $ 205000 salary and the contribution of $ 19475. In order to provide harry for future education that will be of medium term for which the value is $ 65000. For the purchase of property in the coming future Medium term. Assessor feedback will be- To provide for harry for his future education. $ 65000 for the medium term. This is because, the couple is trying to send their son in a school where the total fees is $ 65000. Thus, the term of this goal is $ Medium term. Goals/need/objectives Timeframe Dollar value Asset Preservation One of the Dalmars two main objectives is to protect their home Short Term $440,000 Income Protection the Dalmars wish to maintain their lifestyle if either of them died or suffered a prolonged illness Short Term $145,000+$60,000 salary and $13,775+$5,700 SG contribution to provide for Harry, this includes his future education Medium Term $65,000 The Dalmars stated that they would like to purchase property in the future Medium Term $ 675000 Insurance on the home content Medium term $ 100000 Insurance on the home building Short term $ 75000 The questions Your response The assessors feedback (a) Do Marie and Stephan need a debt management solution? No No Their payment towards the mortgage is less than their total income. If yes, why? If no, why not? They currently have a positive net cashflow after expenses and taxes. However, they have stated they wish to protect their home and may require advice on reducing their mortgage faster. (b) Do Marie and Stephan currently have adequate life and TPD cover? No No.. TPD is not adequate. The TPD benefits is $ 120000 and the premium on it 1.43 which is relatively less. Stephan should have atleast $ 1370 m of TPD. This will help to meet the pay for harrys childcare and the future education. If yes, why/how? If no, how much should they have, and why that much? Stephan should have additional $1,370m and Marie should have an additional $460K. This is needed to payout their home loan, meet current living expenses, pay for Harrys childcare and future education, account for foregone superannuation savings and cover any medical/funeral costs. (c) Is their current life and TPD cover provided through superannuation the best alternate? No No TPD is only paid off when it needed. It is subjected to tax advantage as well. If yes, why? If no, why? What could be the alternative? The TPD is unlikely to be paid out when it is needed if Marie or Stephan if it is deemed they are still able to work in any occupation for which they are reasonable qualified for rather than for their own occupation. There are tax advantages of having the premiums paid through their super however Stephan plans only offers up to $750K which is inadequate. (d) Do Marie and Stephan require any other insurance cover? Yes Yes.Protection of income and the preservation of asset. It will be 50% will be bifurcated into- Stephan- $ 100, Marie- $ 40 and Trauma- $ 80 in both the cases. If yes, what type of cover? How much do they need? How should it be provided? If no, why? Income Protection - $75% of gross annual salaries plus annual SG contributions. Stephan - $120K (rounded) Marie - $50K (rounded) Trauma - $100K each (e) Is there anything that could impact on Stephans and Maries ability to obtain insurance cover? Yes Yes.. Medical insurance cover will be impacted as Stephan is a chemical engineer and working with the hazardous chemicals. As, Stephan is having some health there is limitation of income insurance. If yes, which cover(s)/why? If no, why not? Stephan works as a Chemical Engineer, working with potentially hazardous chemicals. He also travels to rural and remote parts of Australia where access to suitable medical care may be limited. Further, Stephan has a pre-existing condition, asthma and he is a smoker.These factors may limit his ability to obtain Income Insurance. However, as long as he can show medical history to prove the condition is well managed, and he doesnt have a history of regular hospital visits because of an asthma attack, he can generally still qualify for life insurance. (f) If Marie commences work from home, will this have any impact on her current or recommended insurance cover(s)? Yes Yes If Marie is working from home and leaving her job, the employer will stop paying insurance premium as well as there will fluctuation of income which makes it difficult to sustain the Income Protection Insurance. If yes, which cover(s)/why? If no, why? TPD. The event of business failure can bring on stress leading to disability. The insurer may prefer to waiting one to two years for the business to become establish before offering this cover. If Marie leaves her current employment her employer may stop paying her insurance premiums and the policy may not be portable. Marie is unlikely to get Income Protection Insurance if her income is fluctuating. (g) If Marie commences work from home, would she require any further insurance cover? Yes Yes If yes, why and what would she require? If no, why not? She will require insurance to protect her income (h) Are there any present and/or anticipated future issues associated with your recommendations? Yes If yes, why and what are they? If no, why not? There can be fluctuation of income that can make Marie incapable to pay the insurance premium. (i) Are there any present and/or anticipated future cash flow implications associated with your recommendations? No If yes, why and what are they? If no, why not? Because Marie commences the work from home. So, there will be no other income except from the work so done (j) Are there any taxation considerations with the recommendations? Tax will be levied if crossing the norms set. Section 4- Part A- Strategy- For every $ 500000, it is $ 1.19 pa and $ 1000 of cover. For between 500001 to 1 million, it is $ 1.45 pa and with a cover of $ 1000 For between 1 million to 2 million, it is $ 1.65 pa and with a cover of $ 1000 The strategy that will best suit to Marie and Stephan is the income protection strategy. This will help to protect their income from salary and helps them to avoid the fluctuation in the income and to meet their debts. The income protection insurance helps to protect the income fluctuations. This will help them to take care of their son Harry, to pay off his school fees and to pay off the mortgage debt. Building up of income strategy helps to meet the various requirements. The couples are not having any other personal insurance. The total annual premium on the vehicle is $ 2800 pa. The insurance of $ 100000 on the home contents and $ 750000 on the home building. The estimated price of their home is $ 675000. There is a content excess of $500 and building excess of $1100. There is a cover of legal liability up to $ 20 million. Towards this insurance, $ 145 per month is paid by the couples. Dalgar is having private health insurance with a cover of $ 500. Premium paid towards this cover is $ 270 per month. It also include the health insurance rebate. These payments towards the insurance are not included in the general living expenses. The product (name and URL link) Why you think it may or may not be the best fit for the couple Indicate which product/s you will use in your plan Term Life Insurance It may not be fit to the couple as it is for the specific term insurance NO Whole Life Policy It can be useful to the couple as it will help them to protect their entire life. YES Endowment Plans It is fit for the couple as it is the payment of the amount after a particular term say ten years, fifteen years, etc. YES Unit Linked Insurance Plan It is the insurance plus investment. So not fit for the couples. NO Money back policy It is payment of the particular amount of money after a particular period of time. It fits to the couple. YES Answer here Answer here YES NO Statement of advice Prepared for Stephan and Marie Dalgar Prepared by Authorised Representative Number: 66666 AR Address AR contact details Authorised Representative of KeyPlan Financial Planning ABN: 1010101010 Australian Financial Services Licensee Licence No. 101010 Head office: 88 Money Lane, Accumulation. Executive Summary- It shall consist of the need and objectives of the client. The reason for which the client is looking for the insurance. Here, in this case, the client is looking for the insurance basically for two reasons, one is for the protection of their house and the second one is the take care of their son Harry. Objectives- Knowing the objective helps to select the best insurance policy for the client. There are various types of policy available in the market such as, the endowment policy, whole life insurance policy, money back policy, etc. Strategy and Recommendation- Short term recommendation- I recommend that Marie: increase the current level of life and TPD insurance cover in her superannuation fund to $725,000 commence a self-owned income protection insurance policy to the maximum allowable limit of 75% of his current salary and his superannuation guarantee (SG), on an agreed value basis. commence a self-owned trauma insurance policy with a sum insured of $100,000. I recommend that Stephan: increase the current level of life and TPD insurance cover in his superannuation fund to the maximum allowable and commence a self-owned income protection insurance policy to the maximum allowable limit of 75% of his current salary and his SG, on an agreed value basis commence a self-owned trauma insurance policy with a sum insured of $100,000. I recommend: depositing surplus cash flow into your offset account, until Marie chooses to start working for herself. This should reduce the time required to pay off the home loan while leaving cash free to pay short term requirements such as holidays and near term living costs should Marie start her consulting business. your existing home and contents insurance and landlords insurance be reviewed to ensure it is sufficient. The Dalmars have indicated that the building would cost more to replace than it is insured for. Medium Term- One to five years- The medium term recommendation made by me are- Use of fund to protect the house. The couples are paying the mortgage of their house. Their important objective is to protect their house. I recommend them to go for general insurance in order to protect their house from the uncertain event that may happen. Fund is investment for the schooling of their son harry. It is approximately $ 65000. It also helps protecting the income and thereby, avoid the fluctuation of income. Expected outcome if the advice is implemented- The expected outcome is the advice is implemented is the receipt of the amount around $ 645000 after the maturity of the period. (Cockerell, 1957) Risk in the advice- If the Client fails to pay the amount of premium, his policy may be lapsed, is the risk involved in the same. Fees and commission summary- For per policy the fees is $ 1000. (Cockerell, 1957) Your existing insurance- Personal insurance $ 700000 Car insurance $ 11000 Home contents Insurance $ 100000 Health insurance $ 100000 Income and Expenses information- Client 1 Client 2 Total Assessable income $ 100000 $ 200000 $ 500000 Income after tax $ 80000 $ 150000 $430000 Yearly expenses $ 5000 $ 20000 $ 40000 Estimated surplus Answer here Answer here Answer here Value Liability Net value Home $ 5000 $ 1000 $ 4000 Home contents $ 100000 $ 20000 $ 80000 Motor vehicles $ 11000 $ 2000 $ 9000 Personal assets Answer here Answer here Answer here Employer superannuation $ 2000 $ 1000 $ 4000 Savings account $ 1000 $ 5000 $ 2000 Term deposit $ 2000 $ 2000 $ 5000 Other $ 4000 $ 3000 $ 1000 Investment assets Answer here Answer here Answer here Shares Nil Nil Nil Net worth Answer here Answer here Answer here Income, tax and cash flow Tax calculation Marie Stephan Combined Comments Income from employment Salary 60000 145000 205000 Combined salary will be considered Salary sacrifice 0 0 0 It is Nil Salary after salary sacrifice 60000 145000 205000 Combined salary will be considered Rental income Owned house so no rental income. No house is allowed on rent. Unfranked dividends No investment is shares are made by the couple. Franked dividends No investment is made in the franked dividend. Franking (imputation) credits No credit is made Interest Interst on the mortgage is paid by the couple Other income (e.g. taxable benefits, trust income, investment income) Superannuation profits are received by the couple. Capital gains 1 yr No capital gains Capital gains 1 yr No capital gains Tax-free component of capital gains No tax free component of capital gains Assessable income 60000 145000 205000 Combined assessable income will be considered. Deductible expenses No deductible expenses Donations 50 650 700 Combined donation will be considered. Other Answer here Answer here Answer here Answer here Taxable income Answer here Answer here Answer here Answer here Tax on taxable income Answer here Answer here Answer here Answer here Non-refundable tax offsets (e.g. LITO/SAPTO) Medicare levy Answer here Answer here Answer here No medicare levy. Medicare levy surcharge Franking rebate Refundable rebates and offsets 369 369 738 270/(1-0.1855)*0.1855 split evenly health insurance No childcare rebate Total tax Answer here Answer here Answer here Answer here Presenting Part A the SOA- The choice for the selection shall depend upon the needs of the Couples. They want to protect their house and take care of their son Harry. Hence, they can go for the Money back policy or the whole life insurance policy.(Ben Mahmoud, Larrieu and Pirovano, 2013) Part B- I will consider the points that are not satisfying the client. I will proceed the conversation by finding out what is dissatisfying the client and will try to find alternative in order to convince them. Client should have a faith in both company and policy. This will help them to engage. From the point of the compliance perspective it will help to comply with the need and the policy. I should explain all the points in detail to the client and should find out the financial capability of the client. This will help to find out the stability of the client. It also helps to check the credibility of the client. Thus, the credibility of the client helps to find out the exact requirement and the financial need and whether the client is financially strong to pay off the debt. (Ben Mahmoud, Larrieu and Pirovano, 2013) Marie Stephan Current value 200000 645000 Tax-free component 114000 260000 Taxable component: Taxed element Untaxed element 65000 65000 Preservation: Preserved Nil Nil Unrestricted non-preserved Nil Nil Restricted non-preserved Nil Nil Contributions: Non-concessional contributions: Year 1 Nil Nil Year 2 Nil Nil Year 3 Nil Nil Year 4 Nil Nil Concessional contributions: Year 1 Nil Nil Year 2 Nil Nil Year 3 Nil Nil Year 4 Nil Nil Income protection insurance details Life insured Owner Policy type Company Policy number Benefit amount Waiting period Benefit payment period Annual premium Marie Dagher Money back policy 700000 15 years 1000 Stephan Daghar Money back policy 700000 15 years 3000 Trauma insurance details Life insured Owner Policy type Company Policy number Benefit amount Comments Annual premium Marie Daghar Money back policy 200000 1000 Stephan Daghar Money back Policy 100000 1000 Risk needs Insurance needs Life and TPD Marie ($) Stephan ($) C Clean-up fund Settle all outstanding accounts, including credit cards, bills and funeral costs Estimated funeral/medical costs Nil Nil Total Nil Nil I Income fund The lump sum required to produce a level of regular income that maintains the familys living standard for a defined period Estimated unpaid spousal duties 500 500 General living costs excluding childcare and mortgage payments 1000 1000 Remaining spouses net income Nil Nil Income shortfall if other spouse died Nil Nil Annual income shortfall until Harry leaves university 1000 2000 Total 2500 3500 M Mortgage fund The amount necessary to discharge any existing mortgages Home loan 675000 675000 Total 675000 675000 E Education fund Lump sum determined by calculating each childs education costs and multiplying by the number of years of school and/or university remaining Childcare costs for Harry until school age (four years) 500 400 Total 500 500 Education costs for Harry 65000 65000 Total 66000 66000 Total 66000 66000 R Retirement fund The lump sum necessary to provide adequate funding for retirement 9.50% employer SG contributions 200000 400000 Savings foregone Nil Nil Total 200000 400000 Less value of realisable assets Nil Nil Superannuation 114000 260000 Offset account Nil Nil Less existing life/TPD insurance cover 120000 120000 Recommended sum insured Nil Nil Recommended sum insured (rounded to the nearest $10,000) Nil Nil Reference- Ben Mahmoud, M., Larrieu, N. 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