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Needs Analysis 2
Needs Analysis 2
Q: Robin and Archie have asked their life insurance agent, Bobbie, to calculate how much
insurance they would need in the event of Archie's death. Archie's net income is currently $80,000
per year, while Robin's is $40,000. They contribute the maximum to their RRSPs each year and
contribute the maximum amounts per year to RESPs that they have set up for their two young
children. They prepared the following net worth and expense statements to give to Bobbie.
Assets
$5,000
TFSA (Archie)
$10,600
TFSA (Robin)
$10,600
RRSP (Archie)
$400,000
RRSP (Robin)
$350,000
$750,000
Liabilities
Mortgage outstanding
$400,000
$100,000
$80,000
Robin and Archie estimate that Robin would need to cover 70% of their regular living expenses in
the event of Archie's death. Using the capital retention approach and an interest rate of 3%, how
much insurance does Archie require?
$350,000.67
$533,000.56
$200,000.50
$257,133.33
Oops, You are wrong :(
Your answer was : $533,000.56
The correct answer is : $257,133.33
Rationale: The correct answer is: "$257,133.33"
Assets available at death:
Note: Principal residence is not considered an asset for insurance needs analysis.
$5,000
TFSA (Archie)
$10,600
TFSA (Robin)
$10,600
RRSP (Archie)
$400,000
RRSP (Robin)
$350,000
TOTAL Assets
776,200
Liabilities
Mortgage outstanding
$400,000
$100,000
TOTAL LIABILITIES
$500,000
So capitalising this annual income shortfall Archie will have to provide a capital of $16,000/3%(0.03)
= $533,333.33
Since they have a cash surplus the insurance that Archie requires is $533,333.33 - $276,200 =
$257,133.33
Q: Jenny and Sal Gonsalves are a very successful couple in their mid-thirties. Jenny is a dentist,
who specializes in orthodontic treatment, and Sal is the senior vice-president of marketing for an oil
company. They have three children, ages five, seven, and eight, and call you to discuss making
changes to their current insurance policies based on their current level of income.
Their financial statement is:
Jenny's income (last calendar year)
Sal's income (last calendar year)
Investments (relevant rate of interest 4.3%)
RRSPs
Real estate
Cash
Mortgage
Line of credit (loan)
Credit cards
Personal loans (cars, etc.)
$214,000
$763,000
$608,000
$341,000
$1.23 million
$14,700
$287,000
$225,000
$0
$113,000
How much would be required to pay the last or final expenses of Jenny or Sal?
$625,000
$113,000
$225,000
$338,000