FIN 2063 Insurance in Financial Planning:Tax Issues

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FIN 2063 Insurance in Financial Planning

Question:

Scenario: Client Situation 

You are a financial planner with a specialty in risk management. You’ve completed the LLQP and are licensed to sell insurance products. You love your career and have built a successful practice based mainly on referrals from your satisfied clients. 

Jack, age 49, and Jill, age 48, are one of those referrals. Jack is Vice-President of Marketing at a mid-sized systems firm. His salary is $190,000 + bonus. Last year his bonus was $40,000. Jill is an accountant in private practice. She works from home and typically bills $150,000 a year 

(roughly $100,000 after expenses). They feel pretty comfortable financially but have asked you to flag any gaps that you can see in their risk management strategy. They also have specific questions that they’d like you to address. 

Jack and Jill are married with two children who live at home: Tracey, age 22 and Travis, age 17. Jill’s mother, Lauren age 75, is widowed. Although she is financially independent, she moved in with Jill and her family after the recent death of her husband. She contributes to the family’s expenses and is especially devoted to her granddaughter, Tracey. Tracey, a happy and outgoing woman, was born with Down Syndrome, a common genetic disorder. Otherwise, Tracey is in good health and could easily live to age 60. Jack and Jill would like to keep Tracey at home as long as possible but they are concerned about her ability to adapt if one or both of them dies unexpectedly. As a result, they’re considering moving her into a group home in their city. The group home provides full support to residents. The fee for this year is $58,250. Tracey has seen the place and likes it, in no small part because her boyfriend lives there. 

Travis will finish high school this year and start college in the fall. He’s been accepted into a systems engineering program, considered the top such program in Canada. As the college is in his home town, he’ll be able to live at home. On graduation, he hopes to find employment locally so he can continue to live near his sister, with whom he’s very close. Jack and Jill have invested the maximum in a RESP for Travis and the FMV is $71,415. Given that they will soon start making withdrawals from the plan, they recently switched the investment portfolio to a mix of cash and 

GICs. While it’s been a struggle for Jack and Jill to manage the diverse needs of both children, they love them both deeply and want to make sure they’re set up to be successful in life. This means ensuring enough funds are available to support Tracey in the group home for as long as she lives. In Travis’s case, they intend to pay his annual tuition and related expenses for an undergraduate degree (and a graduate degree should he decide to pursue one). As Travis will likely continue to live at home during this period, they estimate the cost of his education at $15,000 per year for the next six years. They’d also like Travis to have extra money once he graduates, to buy a home or start a business. 

The amount they have in mind for that is $500,000. Aside from these financial obligations, they plan to retire in 18 years and spend all their hard-earned money having fun!

Requirements 

Part I – 10% 

1. A maximum one-page, cover letter/executive summary, in business format that: 

a. Lists the clients’ objectives 

b. Summarizes your major findings and any urgent actions they should take. 

2. Outline the risk management process for your clients. At each step, give them an example of what you would do to ensure the step is demonstrated adequately and professionally. For example, list the objectives, identify the risks Jack and Jill face, etc (6 Marks. 

3. Calculate the amount of life insurance they should purchase using the income approach. 

4. Conduct a Capital Needs Analysis for Jack and Jill, assuming they both die in a car accident tomorrow. Make any reasonable assumptions. Include the assumptions in report and answer the following: 

A. Is their existing life insurance coverage adequate? If not, how much should they purchase and what type/s of life insurance would you recommend? State your reasons for selecting that type of life insurance. 

B Explain the tax implications related to: 

a. The death benefit that Jill received as a beneficiary of her father’s policy. 

b. The annual increase in cash value in her whole life policy. 

c. The dividends she received this year from her whole life her policy. 

d. Jack’s group life insurance premiums that are paid by his employer. 

C. Jack and Jill have insured their mortgage through the bank when they took the loan. Explain the drawbacks of this type of “creditor” life insurance.

Part II – 10% 



5. Risk of loss of income due to a long-term disability: 

a. If Jack is severely injured in a car accident and cannot work for four months, how much will he collect in total during that 4 month period from his disability insurance policies? 

b. Would you recommend Jack and Jill buy additional LTD coverage? Why or why not? 

6. Risk due to accident or sickness: 

a. Jill purchases Tracey’s medications. How much of Tracey’s prescription would be reimbursed if the total claim for the year is $1,200? 

b. Whose extended healthcare plan provider is primary if: 

i. Jill needs a prescription filled 

ii. Travis needs a prescription filled 

iii. Jack and Jill get divorced and Jill has custody of Tracey. When Jill marries Bob, she cancels her extended healthcare plan because she’s covered under Bob’s. Jack is still working and a member of his benefits plan. Tracey needs a prescription filled. 

7. Risks related to retirement planning Would you recommend Jack and Jill consider switching any of their existing investments to segregated funds? Why or why not? 

8. Is the family exposed to any other personal risks? Do you have any other recommendations? Should they purchase homeowners’ insurance?

FIN 2063 Insurance in Financial Planning

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