Chapter 8 & 9 Q&A

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School

University of Ontario Institute of Technology *

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3430U

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Finance

Date

Apr 3, 2024

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docx

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Uploaded by DrSummer7456

Chapter 8) - You can supplement your insurance with __Umbrella personal liability__ policy, which provides additional personal liability coverage. - The higher the value of the home, the higher the insurance premium. The lower the value of the home, the lower the insurance premium. 1. Consider a policy owner who pays $1000 in auto insurance premiums for the year. Assume that he is in an accident and the insurance company has to pay $25 000 to cover liability and repair the car. The insurance company expects to pay a total of $500 000 in claims for the year with respect to the group of policy owners of which this individual is a member. Business expenses for the year are $50 000. Investment earnings on premiums received are $25 000. How many insurance policies must the insurance company sell to break even (that is, to earn $0 in profit)? Assume that all policies are sold for a $1000 premium. Solution Break even point is the sale point where the business has zero profit & zero loss. In the given case, Total expenses = 500,000 (Total amount of claims to be paid) + 50,000 (Business Expenses) – 25,000 (Investment Income) = $ 525,000 No. of policies to be sold = Total Expenses / Premium per policy = 525,000 / 1000 = 525 policies 2. Chapter 9) Financial Planning Problem 3 $201,600 4 $129,600 5 $234,852 3) Ingrid is a widow with two teenage children. Her total income is $3000 per month, and taxes take about 30 percent of this income. Using the income method, Ingrid calculates she will need to purchase about eight times her after-tax income in life insurance to meet her needs. How much insurance should she purchase? Solution Insurance to be purchased= 3000*12(1-.3)*8 =201,600

4) Ingrid’s employer provides her with two times her annual gross salary in life insurance. How much additional insurance should she purchase based on the information provided in problem 3 ? Solution Additional Insurance= 201600-((3000*12)*2) = 129,600 5) Roberto is married and has two children. He wants to be sure that he has sufficient life insurance to take care of his family if he dies. Roberto’s wife is a homemaker but attends college part-time, pursuing a finance diploma. It will cost approximately $40 000 for her to finish her education. Since their children are teenagers, Roberto feels that he will need to provide the family with income for only the next 10 years. He further calculates that the household expenses run approximately $35 000 per year. The balance on the home mortgage is $30 000. Roberto set up an education fund for his children when they were babies and it currently contains a sufficient amount for them to attend college or university. Assuming that Roberto’s wife can invest the insurance payments at eight percent, calculate the amount of insurance Roberto needs to purchase. Amount of insurance to purchase: 234,853 + 30,000 + 40,000 = $304,853 1. Peve’s group insurance policy specifies that he pays 30% of expenses associated with orthodontic treatment for his children. If Pete incurs expenses of $8,700, how much would he owe? Solution Amount Owed = Expenses Incurred * Percentage Owed per insurance policy. = 8700*30%= 2610

2. Christine's total monthly expenses typically amount to $1700. About $90 of these expenses are work-related. Christine's employer provides disability insurance coverage of $750 per month. How much individual disability insurance should Christine purchase? Solution The amount of individual disability insurance Christine should purchase is $ = Total monthly expenses -work related expenses - employer's disability insurance = 1700-90-750 = 860 3. Ingrid is a widow with two teenage children. Her total income is $3,400 per month and taxes take about 11 percent of this income. Using the income method, Ingrid calculates she will need to purchase about eight times her after-tax income in life insurance to meet her needs. Solution Annual gross income = 3400*12 = 40800 Annual disposable income= 40800(1-0.11) = 36312 Insurance to be purchased = 36312*8= 290496 4. Ingrid is a widow with two teenage children. Her total income is $2,700 per month and taxes take about 15 percent of this income. Using the income method, Ingrid calculates she will need to purchase about eight times her annual disposable income in life insurance to meet her needs. Therefore, she will need to purchase life insurance in the amount of $220,320. Now assume that Ingrid's employer provides her with two times her annual gross salary in life insurance. Solution Additional insurance = 220320 – ((2700*12) *2) = 155520 5. Amount of Insurance Needed. Peter is married and has two children. He wants to be sure that he has sufficient life insurance to take care of his family if he dies. Peter's wife is a homemaker but attends college part-time pursuing a law degree. It will cost approximately $40,000 for her to finish her education. Because the children are teenagers, Peter feels he will only need to provide the family with income for the next ten years. He further calculates that the household expenses run approximately$54,700 per year excluding the mortgage payments. The balance on the home mortgage is $140,000. Peter set up a college fund for his children when they were babies, and it currently contains sufficient funds for them to attend college. Assuming that Peter's wife can invest the insurance proceeds at 6%, calculate the amount of insurance Peter needs to purchase. Solution

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Amount of insurance to purchase= 402,596.76 + 40,000 +140,000 = $582597 6. Amount of Insurance Needed. Marty and Mary have jobs and contribute to the household expenses according to their income. Marty contributes 75% of the expenses and Mary contributes 25%. Currently, their household expenses are $24,400 annually. Marty and Mary have three children. The youngest child is 12, so they would like to ensure that they could maintain their current standard of living for at least the next eight years. They feel that the insurance proceeds could be invested at 6%. In addition to covering the annual expenses, they would like to make sure that each of their children has $30,000 available for college. If Marty were to die, Mary would go back to school part-time to upgrade her training as a nurse. This would cost $30,000. They have a mortgage on their home with a balance of $82,914. How much life insurance should they purchase for Marty? Solution Marty = 75% *24400 = 18,300 College fees For 3 Children = 30,000 * 3 = 90,000 Amount of insurance to be purchased = 113,639.23 + 90,000 + 30,000 + 82,914 = 316553