BUTTERFIELD CASE

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Washington State University *

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325

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Finance

Date

Feb 20, 2024

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Facts about the Butterfields  John Butterfield and his wife Haley live in a new home on the outskirts of Any city, Any state.  John is 49 years old, and Haley is 44 years old.  They have been married for 23 years and have three children.  Their son Troy is 20 years old and is a baseball player on scholarship at the University of Anystate.  Daughter Holly is 17 years old and plans to attend State University next fall as a cadet to begin pursuing a career in the Marine Corps.  The Butterfields have concentrated their college saving goals on their youngest daughter, Naomi, who is 13 years old.  Both John and Haley are in excellent health.  The Butterfields have come to seek help for financial planning questions and concerns. Global Assumptions (Valid unless Otherwise Specified in Certain instances) - Inflation: 3.5 percent - All income and expense figures are given in today’s dollars. - Federal marginal tax bracket: 22 percent - State marginal tax bracket: 5.75 percent - Any qualified plan or IRA contribution growth rates are assumed to stop at the federally mandated limit unless otherwise restricted. - All nominal rates of return represent pretax returns. Income Issues - John has worked for the last fourteen years as an engineer for CNS Design. He has a salary of $81,000. He would like to retire at age sixty-seven. - Haley has worked as a CPA for seventeen years, the last fourteen of which have been out of their home. She also does consulting work from home. Though her earnings vary from month to month, she estimates that she will earn $65,000 this year. She wants to retire at the same time as John. - John and Haley also assume that their salaries will increase, on average, by 3.5 percent per year over their working lives. This year John and Haley anticipate earning $600 in interest and non- qualified mutual fund dividend distributions, which will be reinvested.

1. Which of the following strategies can the Butterfields use to improve their cash flow situation? a. Pay off credit card balances with monetary assets. b. Decrease insurance deductibles. c. Reduce IRA contributions and use the proceeds to purchase a variable universal life insurance policy. d. All of the above. 2. The Butterfields’ current ratio is (rounded): a. 0.62 b. 0.79 c. 1.68 d. 3.00 3. The Butterfields’ savings ratio, using gross earned income and including employer 401(k) matching but excluding reinvested interest and dividends, is (rounded): a. 4 percent b. 10 percent c. 16 percent d. 22 percent 4. John and Haley have retirement account balances. John and Haley would like to know what their options will be in relation to these balances when John and Haley reach retirement. Which of the following statements describes their IRA retirement situation? A. John can roll over his 401(k) account balance into an IRA. B. Haley cannot roll over her account balance because her assets are held in a Keogh.

C. Both John and Haley can roll over their account balances into an IRA and take a special five-year averaging tax technique on amounts withdrawn at that time. D. Haley can roll over her Keogh account balance into an IRA. a. III only b. I and II only c. I and III only d. I and IV only 5. Which of the following is true if Haley closes her CPA practice to join a large consulting company this year? a. Because she will be changing jobs, she will no longer be covered under her current health insurance plan; instead, she will need to continue coverage using COBRA provisions until she become eligible for coverage with the consulting company. b. She can remain on John’s health insurance policy until she is eligible for benefits under her new employer’s insurance plan. c. Because of her good health status, if she were to drop off of John’s health insurance plan and move to a policy offered by the consulting company, John’s health insurance premiums will increase. d. She must enroll in a marketplace health insurance plan in the state where she resides. 6. If John, Haley, and Naomi are involved in an accident that requires medical care, how much will John’s health insurance pay, including deductibles and copayments, given the following expenses? Assume no annual limits have been met. John $1,800; Haley $3,700; Naomi $4,200.

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a. $1,750 b. $7,160 c. $7,950 d. $8,950 7. Help John understand their homeowner’s insurance coverage. They currently have an HO-3 policy (Special Form) with no endorsements. What perils are excluded from coverage? a. Flood b. Fire c. Collapse caused by a covered peril d. Weight of ice e. Volcanic eruption 8. If the Butterfields suffer a $47,000 homeowner’s loss due to fire, how much will the insurance company pay on the claim, accounting for any deductible and co-pay provisions? a. $45,193 b. $45,693 c. $46,500 d. $47,000 9. The Butterfields recently lived through a major windstorm. The experts said the storm was not a tornado, but John and Haley would argue otherwise. Their home was terribly damaged. It has been estimated that it will cost $250,000 to make repairs to the house. Excluding listed deductibles and copayments, how much must the Butterfields pay out of pocket toward the repairs? a. $0

b. $500 c. $5,000 d. $7,500 10. The Butterfields might be able to reduce their personal automobile policy insurance premiums by applying for which of the following discounts? a. A good student discount. b. A multicar discount. c. A farm use discount. d. Both a and b. 11. Which of the following statements is true about the Butterfields’ PAP? A. They are covered if injured while driving someone else’s car. B. They are covered while driving either the Honda or Toyota. C. They are covered if John and Haley rent off-road motorcycles to tour the desert while on vacation. a. I only b. II only c. I and II only d. I, II, and III 12. During a recent thunderstorm, the Butterfields’ Honda Accord received $2,300 in damage from hail. How much will the PAP pay for this claim? a. $0 b. $2,050 c. $2,200 d. $2,300

13. Haley is worried that Troy will be without health insurance after he graduates from college with his B.S./B.A. degree in a few years. Haley’s primary worry is that Troy may not immediately find employment or be eligible for employer-provided coverage for an extended period of time, such as ninety days. Given these concerns, which of the following optimizes Troy’s insurance coverage once he graduates? a. Purchase no coverage; Haley’s concerns are not valid as the Affordable Care Act (ACA) of 2010 extends coverage under a parental policy until young adults reach the age of twenty-six. b. Purchase no coverage; Haley’s concerns are not valid as the Affordable Care Act (ACA) of 2010 extends coverage under a parental policy until the age of twenty-six as long as the young adult does not have coverage available through an employer plan. When available, he will have coverage. c. Extend Troy’s current coverage through a COBRA extension. d. Purchase insurance through an Affordable Care Act (ACA) of 2010 high-risk pool. 14. Which of the following risk management recommendations is most appropriate to help the Butterfields manage their risk exposures? A. Purchase an excess liability insurance policy. B. Decrease their homeowner’s coverage to 80 percent of the home’s value. C. Eliminate collision coverage on the Toyota. D. Purchase an endorsement to cover the family’s art collection. a. I and III only b. II and IV only

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c. II and III only d. I and IV only 15. Which of the following strategies can the Butterfields use to increase their current discretionary cash flow situation? a. Increase the deductible in their PAP policy. b. Purchase an umbrella liability insurance policy. c. Decrease the deductible in their HO policy. d. All of the above. 16. John and Haley are not sure whether they are paying an appropriate premium for Haley’s universal life insurance policy. Which statement below is true in relation to this concern? a. The universal life policy is fairly priced according to the yearlyprice-per -thousand formula. b. Even though the yearly-price-per-thousand formula states that the policy is overpriced, given Haley’s health status, she should hold the policy because she probably will not qualify for another policy. c. Even though the universal policy is expensive, Haley should not replace the policy because the cost is less than two times the yearly-price-per-thousand formula benchmark price. d. Haley should replace the universal policy because, according to the yearly-price-per-thousand formula, the cost is more than two times the benchmark price. 17. Haley would like to know the difference between variable life insurance and universal life insurance. Which of the following statements most accurately describes the difference? a. Variable life insurance uses subcontracts that are invested to

generate a guaranteed rate of return. b. Universal life insurance uses a fixed mortality charge, whereas variable life insurance does not. c. Variable life insurance has a death benefit that varies, whereas universal life insurance provides only a fixed death benefit. d. Universal life insurance provides a crediting rate based on the insurance company’s general account subject to a minimum guarantee, whereas variable life insurance uses subaccounts that can fluctuate based on market returns. 18. Which of the following is an advantage for John and Haley if they decide to fund their children’s college expenses using a Section 529 plan? a. The contribution will allow John and Haley to take a federal and state income-tax deduction, which will reduce their overall tax liability. b. If a beneficiary of the Section 529 plan does not use the assets, John and Haley may name a new beneficiary of the account. c. Because of the special tax structure of Section 529 plans, the assets held in the plan will not increase the expected family contribution for financial aid. d. All of these answers are advantages. 19. Which of the following is an advantage associated with the Butterfields’ current health insurance coverage? a. John’s employer pays two-thirds of the total premium, which makes the cost of the group health policy reasonably low. b. The annual per person deductible and family maximum coinsurance amount associated with the policy is very reasonable, as

compared to the maximum allowable family out-of-pocket limits set by the ACA of 2010 for a Health Insurance Marketplace plan. c. Once Troy and Naomi graduate from college and obtain health insurance coverage through an employer, John and Haley should drop John’s employer-provided health insurance coverage and purchase a plan through an Affordable Care Act of 2010 exchange because the costs will be lower and the benefits higher. d. All of the above statement are true. e. Only statements a and b are correct. 20. Which of the following is true for John if he purchases additional life insurance through his employer? a. Few exclusions are associated with these types of policies. b. Because most group term policies have a conversion feature, he can be assured that upon termination of employment he can continue his coverage. c. He can tailor the coverage to his own needs. d. All of the above are true. EXPLAIN WHY THE BUTTERFIELDS SHOULD PURCHASE EXCESS LIABILITY INSURANCE Because of the assets owned by the Butterfield’s, and their lack of sufficient home owners insurance, they should purchase an excess liability or umbrella policy. They own around $133,000 in assets which are more likely than not stored within the house, these assets are expected to be passed down to their children as well. Their current policy covers losses up to the amount of 50% of the property or dwelling and with this goal of passing these assets to the next generation, they should further protect them with an excess liability policy. Unexpected events can occur at any time and cannot be planned for, but you can prepare, in this case the Butterfields are under prepared to accomplish their goals if there was an unexpected event or emergency which were to occur. Long term care is a form on insurance to cover costs associated with growing older such as medical bills, housing costs, and simple day to day purchases which are essential. Without having this sort of plan,

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costs can add up extremely quickly. Considering the Butterfields have three children which depend on them, have a fair amount of time before retirement, and a decent financial situation, they should purchase LTC insurance as a safety net for them and their children. If their children do not pose to be as successful as they might believe or the parents run into serious medical issues, this policy will be a blessing to the Butterfields and the generational wealth of the family. Facts about the case relating to insurance planning 1. John and Haley want to pass their assets onto their children, and be protected in the event of a catastrophic emergency. 2. They do not currently own an LTC plan, but need to in order to successfully accomplish their goals. 3. John has a disability coverage provided by his employer which pays a $5,000 monthly benefit until age 65, Haley does not have disability coverage. 4. Their health care plan has a monthly premium of $600, with 66% paid by johns employer, a $250 per person deductible, a family co-insurance provision of 20%, and an out of pocket cap on co-payments at $1,000. 5. The Butterfields would like to use 80% of their combined incomes before taxes to represent the total household expenses in the event of a death. 6. At age 66, Haley will be eligible for a $13,000 annual social security benefit and John is entitled to a $10,000 annual survivor benefit. 7. Their auto insurance covers up to $300,000 single limit, $1,000 medical per person with a $250 collision deductible and a $100 comprehensive deductible. The premium is $1,100 every six months.