Case Studies of Life Insurance Needs Analysis

1) Carlos and His Preferred Shares in a Private Holding Company

Requirements:

This assignment is to be completed individually. Your answers should be unique and not resemble other students. Any form of academic dishonesty will result in a mark of zero on this assignment.

1) Carlos, age 62, owns preferred shares with a FMV of $1,000,000 in a private holding company. The shares are not expected to ever change in value. They do have an ACB of $100,000, however, so Carlos is looking at a capital gain of $900,000 when he eventually disposes of the shares. He estimates that this will result in a tax liability of about $225,000. Carlos has substantial cash flow both from dividends on the preferred shares as well as other sources. So, he does not think he will dispose of the share until he dies and plans to leave them to his adult children.

2)      Forty-five-year-old bachelor Joe and his twin bachelor brother, Jim, recently opened a short-haul trucking business that is just getting off the ground. Money is tight, yet the brothers agree that there should be a financial cushion to help the survivor carry on with the business in case one of them dies. They estimate that $50,000 would be required now to cover bank loans and as much as $200,000 within three years if there plans for the growth of the business materializes.

3)      When Michael Jackson married, Martina, he bought a term life insurance policy with a monthly premium of $60 to protect his wife in the event of his unexpected death. He subsequently converted the policy to $250,000 of Universal Life and increased the premium to $100/month. Four years later, Michael and Martina had a baby and Martina decided to stay home until their child was of school age. As a result, Michael’s insurance needs have significantly increased – he estimates his need today at $400,000 – but right now, with Martina not working, he has even less money available for life insurance.

4)      Zainab expects to have about $200,000 in her RRSP when she retires in 5 years time. She plans to convert the RRSP to a RRIF when she turns 71 and take the minimum payments starting at 72 years old. Zainab is a cautious, conservative investor who does not like to spend much time managing her investments. That said, if she can repeat her past investment performance, the RRIF should continue to grow in value at a slow, steady pace, despite the minimum withdrawals. You have determined that Zainab will need about $100,000 to pay the tax on her RRSP/RRIF proceeds on her death.

2) Joe and Jim: A Short-Haul Trucking Business

5)      Mickey is a 30-year old professional musician whose earnings have averaged $35,000 over each of the last four years. He has no group benefits and has been unable to achieve any real savings. Mickey’s parents are living on Old Age Security and Guaranteed Income Supplement pension benefits, with occasional support from Mickey when he can spare the money. As an only child, Mickey wants to be able to provide additional financial support to his mother whether he lives or dies if, as expected, she survives his father for several years.

6)      Jen Jackson is a newly accredited Chartered Professional Accountant. At age 28, Jen is heavily indebted: she has $30,000 in student loans and owes her father $60,000 for support while she was at University. She also has a bank loan of $20,000, money that she needed to start up her practice. Jen is sharing her office space with Ann Gunn, who is in much better shape financially than Jen. Right now, Anne is paying most of their ongoing business expenses.

While Jen is starting to make decent money and is sure that her practice will take off within the next 2 years, it bothers her that she owes so much money, especially to her father and Anne. As a result, she would like to purchase sufficient life insurance to pay off all her debts should she die prematurely. She also foresees the possibility of formalizing her business partnership with Anne and recognizes that business insurance will be a priority as their practices grow.

Jen has already looking into getting term insurance through the association plan offered for CPAs. She decided not to pursue it because she did not like the fact that her premiums could increase.

7)      Roman owns a sporting goods store in partnership with his brother, Novak. Both are in their 30’s. The business is currently worth $200,000 and the brothers expect it to grow. They both hope their sons, who are currently in high school, will join the business as junior partners. Roman and Novak have a buy/sell agreement proving that, on the death of either, the survivor would buy the deceased’s shares from his estate. The buy-out price is currently $100,000 but that is subject to change based on periodic valuations of the business. While the business can afford insurance right now, cash flow can be sporadic.

8)      Diana is a separated mother of two-year old Samantha. They live in Diana’s mother’s basement apartment. Her mother looks after Samantha during the daytime, Diana works in a local retail store; however, funds are very tight. She wonders if she should buy insurance on her life to help her mother with Samantha’s expenses and eventual education if Diana should die prematurely.