Question

Andrew is employed as a biologist for a start-up medical firm with a stable annual salary of $200,000. Kristin works part time as a pharmacist making $125,000/year. Andrew and Kristin have different levels of risk tolerance. Andrew tends to be a riskier investor and Kristin is by far more conservative. The family has no outstanding debt outside of a mortgage on their primary residence. The outstanding mortgage balance totals $280,000 against a fair market value of the home of $520,000. Their liquid assets consist of jointly held bank deposits ($10,000), mutual fund ($78,000) and combined retirement assets of $500,000. The only life insurance they own is a one year term policy on John through his employer that covers 2x his base salary. Kristin does not carry any life insurance. The family spends roughly 37% their combined base salaries on taxes, with the remainder used to provide for their family. They plan to retire at age 67. Assume a 5% opportunity cost in any analysis.The couple’s goals are to provide enough life insurance in the event of their premature death to provide for their children to age 18 and to provide some funds for their college education ($200,000 in total for both kids).

Please complete the following: 1) Determine the “family type” Andrew and Kristin represent and discuss the level of need for life insurance given this family type. 2) Calculate the amount of insurance (on one or both) they should obtain given their personal information and goals as noted above using all four methods we discussed in class. 3) Finally, what type of life insurance would you recommend they obtain and why?

Answer 1

1.) Andrew and Kristin seem like young adults in the age range of 32-38 and looking at their Finances and Net worth, they seem in a good financial standing. They only have house Mortgage and shall continue to use their Income to pay off the Installments towards their home. As far as Insurance goes, they're definitely under insured. Although Andrew get Insurance provide from his employer, it's not really a good idea to rely on it as the Insurance cover will go if he chooses to part ways with the compnay in future and the Premiums would be much higher than they're right now as he'd need to buy cover once he leaves.

2.) Thus, it's imperative they buy a cover for both of them as both of them are earning and shall have roughly 10 years income as per current levels as their sum assured. This means Andrew should buy an Insurance with atleast 2 million Sum Assured and Kristin with 1.2 Million.

3.) There are broadly two types of Insurance plans and severa iterations amongst them. These are Endowment Plans and Term Plans. Endowment plans charge a higher Premiums every year for a lower Sum assured but return the Premium paid to Insurance Company towards the end of Insurance term if there is no casualty. Term Plan are pure risk covers and cost fraction of what endowment plans cost for a much higher sum assured.

Since, the sum assured ascertained in point 2 is a big number and they'd want to leave that sum for their children, going for a term plan preferably an Online Term Plan is a good choice as Sum Assured would be as desired for a lower costs.