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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Financial Planning Process & Insurance. Session 9 Life Insurance Needs Calculations Policy Replacement Decisions. Session Details. The Winn Family (1).
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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Planning Process & Insurance Session 9 Life Insurance Needs Calculations Policy Replacement Decisions
The Winn Family (1) Rodney Winn is 38 years old and is married to Margaret, age 36 (Step 8). They have two children, Jacob, age 17, and Susan, age 15 (Step 5, Step 7). All are in good health. Both children are planning to attend the state university located in their city. Assume each child will begin college on his or her 18th birthday and end on his or her 22nd birthday (Step 6). Current costs are $6,000 (Step 6) a year per student. Rodney’s take-home pay is $2,100 (Step 5) a month. Margaret works as a receptionist and earns a net amount of $950 (Step 5) a month. Margaret and Rodney have a low risk tolerance. The Winn family’s net worth is approximately $175,000. They own $34,000 in liquid assets (Step 1, Step 4), which is well above the preferred amount of emergency funds of three months of fixed and variable expenses, and $12,500 in nonliquid assets (Step 2), and have approximately $20,000 (Step 3, Step 4) in liabilities. They put $6,500 into savings annually. Margaret would most likely liquidate the majority of these assets in the event of Rodney’s death.
The Winn Family (2) • Rodney has a $25,000 group term life insurance policy. The Winns have adequate health and major medical coverage, which make a last-illness fund unnecessary. They expect minimal estate transfer costs and funeral costs (approximately $4,000 [Step 3, Step 4]). The Winns feel that Social Security will not be available in the near future for their age category, and they would like Social Security, death, and retirement benefits to be ignored. They feel they can obtain an after-tax return of 7% (Step 5, Step 6, Step 7, Step 8) on their investments and that inflation will average 5% (Step 5, Step 6, Step 7, Step 8) over the long run. • Margaret would like to maintain her current lifestyle through retirement if something were to happen to Rodney, although her needs will be reduced substantially after the children have completed college. The Winns expect that after Jacob and Susan leave home, Margaret’s income needs will be half of the Winns’ current income needs ($36,600 ÷ 2 = $18,300 [Step 7, Step 8]). Additionally, half of this amount will be provided by the retirement benefits under her pension plan at work when Margaret turns 65. At that point (i.e., at retirement), Margaret would like to be able to provide a guaranteed lifetime income for herself.
Question - Postmortem Expenses • Postmortem expenses typically include all of the following except • funeral expenses. • investment funds. • last illness expenses. • estate taxes.
To Keep or Replace a Policy Factors to Consider • Health issues • New acquisition costs • Existing policy values • New contestable and suicide clause period • Dividends in new policy likely lower • New initial cash value likely lower
Question - Life Insurance Policy Replacement • Which of the following does not accurately describe a valid policy replacement scenario? • Replacing one term policy with another is usually the least complex of the alternatives. • Replacing a cash value policy with a similar cash value policy usually is not advantageous. • Replacing a cash value policy with a term policy usually is unwise. • Replacing a term policy through the policy’s conversion clause is usually the best and least expensive alternative.
CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMFinancial Planning Process & Insurance Session 9End of Slides
