Client Situation

You are a financial planner with a specialty in risk management. You’ve completed the insurance
in financial planning course at GBC and have obtained your license 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 $180,000 + bonus. Last year his bonus was $50,000. 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 78, 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!

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Current Insurance Coverages

Jack’s group benefits from his employer include the following:

Life Insurance: Two times salary (excluding bonus or commission) to a maximum of

$200,000

Dependant Life Insurance: $10,000 on the employee’s spouse, $5,000 on each of the
dependent children

Disability Insurance: Provided with 60% of salary up to a maximum of $4,000 per month,
“regular occupation” definition for the first two years defaulting to “any occupation”
thereafter, 180-day elimination period, benefit period to age 65 and partial disability
benefits.

Extended Health Coverage: The plan covers Jack, his spouse and dependants. There are
no deductibles and no maximums. Coinsurance is 80%.

Dental Coverage: Jack’s plan provides comprehensive coverage. Coinsurance is 80%. The
annual maximum for basic restorative is $2,000.

In addition to his group benefits, Jack has an individual long-term disability policy that he bought
years ago. The benefit is $2,000 per month in the event of his total disability, defined as the
worker’s “regular” occupation and defaulting to “any occupation” after two years. The elimination
period is 60 days and the benefit period is to age 65. There are partial, but no residual, benefits.
He also owns a Manulife universal life insurance policy (see abbreviated copy attached). Jack’s
beneficiary on his life insurance policies is Jill.

Jill has no group benefits. However, she has private coverage for life and LTD insurance. She has
a $250,000 Term 10 policy and a $25,000 participating whole life policy that her parents took out
for her when she was a child. The dividend option on the latter policy is “cash”. Jack is the
beneficiary of both policies. Her LTD coverage will provide a monthly benefit of $3,800 on total
disability, defined as “regular occupation”. The policy has a rider that extends the regular
occupation definition to age 65. The elimination period is 60 days. Like Jack’s plans, there is
partial coverage, but not residual. Both Jack and Jill pay the premiums for all their LTD coverage.

Current Investment Assets

When Jill’s father died six months ago, she received $50,000 from a life insurance policy on his
life. She put the funds into a one-year GIC, which she saw as a temporary move until she could
figure out how best to invest the money long-term. Both Jack and Jill feel that, with the mortgage
paid off, if one of them died the survivor could manage well on his/her continuing income plus the
couple’s joint savings.

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Since Jack and Jill plan to spend all their invested assets in retirement, they expect the planned
legacies for Travis and Tracey and their final expenses at death will be covered solely by their
existing life insurance. They’re not sure if their life insurance is sufficient, but that’s their plan.

Jack and Jill estimate the value of their home at $1,675,000. They have a “small” mortgage of
$215,000 with BMO. This is their only debt. The mortgage is insured with BMO and the
outstanding balance will be repaid should either Jack or Jill die. They recently updated their home
and car insurance. They have two cars and, up until last year, they parked both cars outside in the
driveway. But last fall, anticipating a particularly cold and wet winter ahead, they added a carport
to the side of their house. During this process, they modified and enhanced the entrance to the
home and updated the landscaping at the front of the property to give the house more “street
appeal”. Their general agent pointed out that, because earthquakes have happened in the GTA –
twice in the past 20 years alone, they might want to consider adding a rider to their property
insurance policy to insure their home against earthquake-related damages. But, thinking the odds
of this very remote, they decided their existing property insurance was adequate and declined the
extra protection.

Retirement Planning Issues

Aside from the mortgage, which is insured with BMO, Jack and Jill have no debts.

Their “spendable” assets, in addition to government benefits, include the following:

Jack Jill
GIC - $ 50,000
Self-directed RRSP $ 91,025 1 $185,530
LIRA - $ 75,280 2
RPP $335,011 3 -
Investment Portfolio $495,685 4 -
CV Life Insurance 5 $ 48,361 $ 13,964
1
Due to his salary (and subsequent RPP contributions) Jack’s RRSP contributions are minimal.
2
From her employment prior to working independently.
3
Defined contribution plan. Contributions are 5% of salary and matched by employer.
4
Non-registered, diversified portfolio with focus on growth. Originated from an inheritance Jack
received after the death of his parents.
5
Included for information purposes only. Since Jack and Jill view their life insurance policies as
essential for meeting the financial needs of Tracey and Travis, they don’t plan to surrender them.

Jack and Jill manage their respective investment portfolios and Jack manages the accumulation
fund in his UL policy. They’ve been investing on their own since they started earning money. They
feel confident and find it interesting. They believe they can achieve a rate of return equal to 3%
a year.

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Estate Planning Issues
Jack and Jill have mirror wills. Anticipated final expenses include their funerals and the executors’
and accountants’ fees. They’ve estimated that $50,000 for each of them should be adequate to
cover these expenses. They are each other’s beneficiary. After both have died, the net estate
proceeds will be divided equally between Travis and a trust for Tracy. They both also have Powers
of Attorney for Property and for Personal Care.

Tax Planning Issues

Other than investing in their RRSPs and a vague awareness of income taxes at death, Jack and Jill
haven’t thought much about income taxes. They both have an average tax rate of 35%. Since they
plan to spend all their money in retirement, they don’t foresee any major tax liability on their death.

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 Requirements
Part I - 10%
1. A maximum one-page, cover letter/executive summary, in business format that:
Lists the clients’ objectives
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:

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.

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.

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.

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 Marking Rubric

Section Expectations Possible Marks

Part I (10%)
1 Cover Letter Objectives 4
Major findings/recommendations
Business format

2 Risk Management Examples at each step 6

Process
3 Income Approach Show calculations 4

4 Risk of premature death Capital needs analysis 6

Coverage 2

Tax implications 2

Mortgage Insurance 2

Total marks available 24

Part II (10%)
5 Risk of loss of income Calculations & Recommendations 4

6 Risk due to accident or Hospital accommodation 4

sickness Provider, calculation

7 Risks related to Recommendation and rationale 2

retirement planning
8 Other recommendations 4

9 Final Report Business Format, Spelling Errors 2

Total marks available 16