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Income Of Jeff And Ann

Jeff and Ann are worried about their large debt balance. Advise them on the order (1st to last) in which their debt should be settled in the most cost effective way.

Jeff earns $6,000 per month after Taxes and Deductions (works full time as an Engineer) and Ann earns $3,000 per month after Taxes and Deductions (works Part-time as Lecturer).

  1. Credit Card Outstanding Of Ann

Ann has a Credit Card Outstanding amount of $10,000 on which she pays 18% interest pa. The couple should immediately pay-off this amount in four monthly instalments of $2,500 each thus saving $150 per month.

  1. Overdraft By Jeff

Jeff has an Overdraft of $15,000 from his bank and it is charged at 6.5% pa towards interest. This amount should also be cleared by the couple in six months by paying-off $2,500 every month thus saving $81 on interest payment every month.

  1. Home Loan

House Loan of $55,000 for the Main Residence is against five-year old borrowing of $70,000. The couple has paid-off $15,000 towards the Principal Amount in these five years, @ $3,000 per year. The couple is being charged a Fixed Mortgage Interest Rate of 5% pa. The remaining period of this home loan is 10 years.

An unendorsed homeowner’s policy has a maximum of $1,500 charge on stamps. Jeff and Ann can increase this limit by adding a scheduled personal property endorsement to their policy. Such an endorsement will broaden their liability cover by including exposure to loss due to personal injury. Such a cost or loss settlement endorsement will help them in covering all their personal property on a replacement cost basis rather than on the actual cash value basis, as per Brunhart, (2008).

To pay this home loan principal amount of $55,000 over the next 10 years with fixed interest liability at 5% pa, the couple will have a monthly outgo of $587. In case the couple choses the Economiser Home Loan Repayment option and take the option of paying an additional $500 per month, the loan amount of $55,000 will be paid off in 4 years and 10 months thus saving $8,261 on interest payment, assert Ezra, Collie & Smith, (2009).

  1. Car Loan

Jeff has recently taken a Car Loan of $50,000 for buying a Honda Civic car. Loan Repayment Period is 3 years. Interest Rate is 3.5% for FIRST YEAR; 4.5% for SECOND YEAR and 5.5% for THIRD YEAR.

Monthly Household Expenses And Cash Flow

Cable TV                                                                     $100               

Electricity and Water                                                  $200

Telephone Expenses                                                    $100

Groceries                                                                     $900

Children’s School Fee                                                 $500

Medical Insurance Premium                                       $200

Clothing                                                                      $200

Car Expenses (Gas, Maintenance and Insurance)       $300

TOTAL                                                                      $2,500

Contribution : Jeff (75%)                 $1,875

: Ann (25%)                $625

Cash Available          : Jeff                $4,125

: Ann               $2,375

  1. Calculate for Jeff the monthly repayment on his car loan in the 1st, 2nd and 3rd year respectively.


N=36, I=3.5%/12=0.291667%, FV=0, PV= $50,000

1st year PMT=-1,465

Balance of the loan = -1,465*PVIFA (I=3.5%/12, N=24) = $33,912

N=24, I=4.5%/12=0.375%, FV=0, PV= $33,912

2nd year PMT=-1,480

Balance of the loan = -1,480*PVIFA (I=4.5%/12, N=12) = $17,336

N=12, I=5.5%/12=0.458333%, FV=0, PV= $17,336

3rd year PMT=-1,488

Based on the information given above, calculate how much term life insurance Jeff should purchase using the needs based approach.

Debt Balance Of Jeff And Ann

When considering the best available term life insurance policy, the selected cover shall be based on the following factors according to Ashhurst, (2009):

  • Type of cover: Level Term Life Insurance
  • Male Age 35
  • Term policy: 20 years
  • Non-Smoker Rates Apply

A Summary of the best suitable term life cover for Jeff is -

Life Cover:                                                      $815,000

Total Debt Repayments:                                 $132,500

Total Spending money required:                     $1,156,500

Minus Savings and assets:                              $473,500

Apart from the standard cover shown above, the following cover types are helpful for Jeff in order to protect his future lifestyle, says Drury, (2012):

  • Permanently Unable to Work (OPTIONAL)

Pays a lump sum amount in the event Jeff is permanently unable to work due to sickness or injury, asserts Lim, (2007):                            $812,600

  • Critical Illness (OPTIONAL)

Pays a lump sum in the event Jeff suffers a defined critical illness during the tenure of the insurance cover, asserts Lim, (2007):                             $130,000

Once Jeff’s term insurance expires in eight years, his insurance agent has advised Jeff to convert to a whole life policy. His insurance agent however has warned him that his premiums will increase when compared to his existing term life policy. Explain why whole life insurance policy requires a larger premium than a term insurance policy and how the savings aspect of whole life insurance policies might be useful to Jeff.

Life cover, also known as life insurance or term life insurance or death cover is an effective way for Jeff and Ann of protecting their children's financial future, as per Gitman, Joehnk & Billingsley, (2010). This policy pays a lump sum amount in the event of the insured’s death or even on being diagnosed with a terminal illness where the insured person’s death can occur within 12 months of taking the policy, say Hallman & Rosenbloom, (2003).

Life cover provides the lump sum amount which can be used by the surviving family members to pay-off mortgage payments, school / college fees, sundry bills and other living expenses as well as the funeral costs, according to Hinden, (2000). Life cover will give the survivors the peace of mind, knowing that they will be financially taken care of.

Whole-of-life insurance policy lasts as long as the insured lives. The insured person pays the monthly premium and in case of death, the insurance company pays out the lump sum amount to the surviving family members, asserts O’Shea (ed.), (2004). The major difference between term and whole-of-life insurance policy is that term insurance is issued for a specific time period and whole life policy is valid till the death of the insured. As is evident, this is the main reason why term insurance is cheaper than whole life-insurance policy, as per O’Shea (ed.), (2004).

Another reason why Jeff should take out a whole-life cover policy is the fact that it will help the surviving family members in cutting the family’s tax bill, specifically the inheritance tax (IHT). IHT is charged at 40% on all the assets inherited by the survivors which are worth more than £325,000. Jeff can avail more tax relief if he takes out a whole life policy and writes it under a family trust, as per Lange & King, (2009). Under these conditions, the beneficiaries would receive a cash free lump sum amount, which can be used for paying the IHT.

Monthly Household Expenses And Cash Flow

Although many insurance companies guarantee that they won’t increase the premiums and sum insured during the first 10 years of the policy. Jeff should make sure that this point is understood fully as to how this guarantee will work, asserts Newnham, (2011). How much premium Jeff will pay depends on the sum insured, age, health and how much does he drink or smoke. Basically, when the risk is high, higher is the premium. Jeff and Ann can even take out a joint plan, although the beneficiaries will receive the lump sum amount only once, which shall be on the death of the first person.

Jeff should consider taking out waiver of premium with his policy, as this will cover his monthly premiums in case he falls ill and is unable to make the payments. There are certain plans which cover sickness or disability benefits. Jeff should also take the option of paying the premium till a specific age, says Vice, (2010). Under this condition, the payments will stop once Jeff reaches the set age but the cover will continue till his death.

Jeff met with an accident last month when his car collided with another car. Fortunately, Jeff was not injured. However, Jeff was at fault and the other driver successfully sued Jeff for $80,000 in medical expenses and $21,000 for damages to the other driver’s car. Additionally, as a result of the accident and legal suit, Jeff’s incurred $10,000 in legal fees. Estimate the amount that Jeff’s insurer will pay for the claim under coverage A and how much Jeff will have to pay out of his own pocket.

Jeff’s car insurance policy for the Honda Civic has the following limits:

Coverage A = $100,000

Coverage B = $3,000

Coverage C = $100,000

Coverage D = $250 deductible—collision                        

$250 deductible—other than collision

A Comprehensive Car Insurance Policy for Jeff’s car shall cover not only for his car but also for other people's property damages, asserts Ashhurst, (2009).

  • Cover for all accidental damages to Jeff’s car even if he is at fault.
  • Cover for all kinds of accidental damages to other people's property (including vehicles) which is caused due to partly or fully because of Jeff’s fault.
  • Damage to Jeff’s car in an accident even if he is not at fault and the other vehicle is not insured.
  • Accidental loss or damage to Jeff’s car because of fire or theft.
  • Accidental damage or loss to Jeff’s car including storm, hail and flood.
  • Guarantee on all authorised repairs.
  • Reasonable cost of towing after a reported accident.

Jeff can also avail a “No Claim Bonus Protection” to lodge a claim for one at-fault accident a year without him losing the “No Claim Bonus”. This claim can also be availed in the event of an at-fault accident or in case where the responsible party is not identified and even in cases where Jeff’s car is damaged by nature or wildlife, as specifies by Drury, (2012).

Based on these policy terms, Jeff is liable for paying $11,000 from his pocket as the insurance company is liable for paying $100,000 against the total expense of $111,000 claimed by Jeff.

Calculate for Jeff and Ann how much they can claim under their health insurance policy for their medical expenses that they have incurred in the current year.

Both Jeff and Ann have taken out a medical insurance policy separately before they got married. Jeff’s has a major medical policy with a $500,000 lifetime aggregate limit. The policy has a $1,000 annual deductible and 80/20 co-insurance clause.

Jeff had a knee operation during the year and his medical expenses for the year include hospitalisation of $12,000; surgeon's fees of $14,000 and medication expenses of $5,000.


Hospital Accommodation and Nursing Care             PAID IN FULL

Prescribed Drugs and Dressings                                 PAID IN FULL

Operating Theatre Fees                                               PAID IN FULL

Radiotherapy & Chemotherapy                                  PAID IN FULL

Consultations, Radiology, Pathology                                     PAID IN FULL

Diagnostic Tests including MRI/CT/PET Scans         PAID IN FULL

Physiotherapy                                                                         PAID IN FULL

Surgeons, Physicians & Anaesthetists Fees                PAID IN FULL

Based on these terms of the health insurance policy taken by Jeff, he is eligible to claim the full expenses of $31,000 which he incurred for his knee surgery, consultation and hospitalisation during the illness, as asserted by Gitman, Joehnk & Billingsley, (2010)

Ann’s health policy has a $500 annual aggregate deductible, and 80/20 co-insurance clause and a $5,000 maximum annual out-of-pocket cap. Ann was admitted to hospital for dengue and her total hospitalisation bill for the year was $12,000.

In case of Ann, there is a cap of $5,000 for the out-of-pocket expenses incurred by her during a year on her illness. Hence, she can only claim $5,000 against the $12,000 spent by her in the year on all her medical bills, as explained by Gitman, Joehnk & Billingsley, (2010).

The Jeff and Ann also realise that they need to start saving for their retirement. They hope to retire when they reach 60. Based on their current savings, they estimate they would have a retirement income of $25,000 pa in today’s dollars, but they would actually need $67,500 pa in retirement income to retire comfortably. Calculate how much Jeff and Ann must start saving annually now and if they wish to meet their income projection. Assume that they live up to 90, two percent inflation rate (before and after retirement), and eight percent return on investments before retirement and seven percent during retirement?

Explanation: Calculating PV of a future stream of income.

N = 30, I = {(1.08/1.03)-1} = 4.854369%

PMT = (-67,500) * 1.03^12 = -598,819.57

FV = -67,500

PV = $112,500

Hence, Jeff and Ann need to bring up their savings per annum to $112,500 in order to have sufficient capital which can give them an annual return of $67,500 for a period of 30 years after they retire at 60 years of age, as per Lange & King, (2009).

A colleague of Ann has recommended that she invest in bonds. There are two possibilities. Bond A yields a return of 8% compounded annually while Bond 2 yields 7.75% compounded monthly. Advise Ann which bond she should invest in and why.

Working on the assumption that Ann invests $5,000 every month in bonds and continues to do so for 25 years till she reaches the age of retirement and is 60 years old. Based on the calculations obtained, if the interest is compounded annually on the invested amount, she will get $2,886,356 at the end of 25 years of saving. In case, the interest is compounded on monthly basis, Ann will have $3,255,132 at the end of 25 years of savings. Hence, it is always beneficial to invest in bonds giving monthly compounded interest rates, as described by Vice, (2010).


Ashhurst, L. 2009, Talking about Retirement: The Secrets of Successful Retirement Planning. Kogan Page Publishers, London.

Brunhart, N. 2008, Individual Financial Planning for Retirement. Springer, Heidelberg.

Drury, B. 2012, Sorting Out Your Finances for Dummies. John Wiley & Sons, Milton, Qld.

Ezra, D. D., Collie, B. and Smith, M. X. 2009, The Retirement Plan Solution: The Reinvention of Defined Contribution. John Wiley & Sons, Hoboken, NJ.

Gitman, L. W., Joehnk, M. D. and Billingsley, R. S. 2010, Personal Financial Planning, 12th ed. Cengage Learning, Mason, OH.

Hallman, G. V. and Rosenbloom, J. S. 2003, Personal Financial Planning, 7th ed. McGraw-Hill Professional, New York.

Hinden, S. 2000, How To Retire Happy: Everything You Need to Know about the 12 Most Important Decisions You Must Make Before You Retire. McGraw-Hill Professional, New York.

Lange, J. and King, L. 2009, Retire Secure: Pay Taxes Later - The Key to Making Your Money Last, 2nd ed. John Wiley & Sons, Hoboken, NJ.

Lim, P. J. 2007, Financial Planning Demystified. McGraw-Hill Professional, New York.

Newnham, M. 2011, Funding Your Retirement: A Survival Guide. John Wiley & Sons, Milton, QLD.

O’Shea, B. (ed.) 2004, Retire Ready: The Definitive Financial Guide to Retiring Well. UNSW Press, Sydney.

Vice, A. 2010, A Straightforward Guide to Financial Planning for the Future: From 45 To Retirement, 2nd ed. Straightforward Co. Ltd., Brighton.

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