SAm and scully insurance (Essay Sample)

Insurance Analysis for Sam and Susan Scully Part A: Life Insurance Requirements Income Method The income method estimates the present value of future income that would be lost if the income earner dies. This approach focuses on replacing the deceased's earning capacity to maintain the family's standard of living (Rejda & McNamara, 2017). Sam's Life Insurance Requirement Sam's take-home pay is $70,000 annually, and he has 30 years until retirement at age 65. Using a 3% discount rate, the present value of his future income stream is calculated as an annuity: PV=PMT×1-(1+r)-nrPV=70,000×1-(1.03)-300.03=70,000×19.6004=$1,372,028 Existing coverage: Sam has employer life insurance of $190,000 (2 × $95,000) plus $100,000 whole life, totalling $290,000. Additional insurance needed: $1,372,028 − $290,000 = $1,082,028 Susan's Life Insurance Requirement Susan earns $15,000 annually. Additionally, her homemaker services would cost approximately $25,000–$30,000 annually to replace, bringing the economic value to roughly $40,000 per year until the youngest child reaches independence (approximately 16 years). PV=40,000×1-(1.03)-160.03=40,000×12.5611=$502,444 Additional insurance needed for Susan: approximately $500,000 Expense Method The expense method calculates the capital required to cover immediate expenses, ongoing living costs, and future financial goals (Brown, 2016). Immediate Needs Item Amount Mortgage payoff $200,000 Emergency fund $20,000 Final expenses $15,000 Total $235,000 Ongoing Expenses Annual living expenses (estimated at 70% of current combined take-home of $85,000) equal $59,500. If Sam dies, Susan would need this for approximately 20 years until children are independent and she approaches retirement: PV=59,500×1-(1.03)-200.03=59,500×14.8775=$885,211 Education Funding Additional RESP contributions needed: approximately $40,000 (current balance is $10,000; target of $50,000 total). Total Expense Method Requirement for Sam $235,000 + $885,211 + $40,000 = $1,160,211 Less existing coverage ($290,000) and assets ($64,000 in TFSAs, bank accounts, and RRSP) = $806,211 additional needed. Part B: Analysis of Other Insurance Needs Risk Management Framework Effective risk management involves identifying exposures, evaluating frequency and severity, selecting appropriate techniques, and monitoring results (Rejda & McNamara, 2017). Property Insurance Homeowners Insurance The current $100,000 coverage is critically inadequate. With market value at $400,000 and land at $80,000, the dwelling replacement cost is approximately $320,000. Current coverage represents only 31% of replacement cost, which will trigger co-insurance penalties and leave the family severely underinsured. Recommendation: Increase dwelling coverage to $320,000 with guaranteed replacement cost endorsement. Increase the deductible to $500 to reduce premiums while maintaining adequate protection. Auto Insurance Current $200,000 liability coverage is adequate for Manitoba, but could be increased to $1,000,000 given their asse...