BUSI 489 Week 3 Targeted Financial Plan 3 Example

Targeted Financial Plan 3: Risk Management and Insurance for the Whitaker Household

Current Coverage

Life Insurance Needs: Daniel

The analysis assumes that if Daniel died, the family would want to pay off debts, fund the college goal, keep the home and maintain its current standard of living until the younger child turns 22, in 15 years. Future needs are discounted at a 2 percent real rate.

The income gap assumes the family would need about $6,000 a month after the debts are paid, and that Grace's part-time income would provide about $2,700 of it.

The shortfall is large but common. Bernheim et al. (2003) compared older couples' life insurance holdings, using the Health and Retirement Study, with the drop in living standards each spouse's death would cause, and found almost no relationship between the two: coverage bore little relation to vulnerability, and many surviving spouses would have faced large declines. A death benefit set at one or two times salary, the default many families accept through work, rarely matches what a young family would actually need.

Life Insurance Needs: Grace

Grace's income of $38,000 is only part of her economic value. If she died, the family would lose her earnings and would need to pay for after-school care, transportation and household help while Daniel continued working full time. Estimating those costs at about $20,000 a year until the younger child is 18, plus her lost take-home pay, puts her need near $500,000.

Why Term Insurance

Term insurance fits the Whitakers' need because the need itself is temporary. The largest items in the analysis, the mortgage, college and income until the children are grown, shrink each year and largely disappear within 20 years, while their retirement savings grow. Permanent insurance, such as whole life, would cost many times as much for the same death benefit, and the premium difference is money the family needs for debt payoff, emergency savings and retirement. A 20-year level term policy locks in a premium while the need is greatest and expires about when the youngest child finishes college. If a permanent need emerges later, for example to provide liquidity for an estate, it can be addressed then with a smaller policy.

Disability Coverage

Daniel's group long-term disability policy pays 60 percent of salary, about $5,900 a month, but because his employer pays the premium, the benefit would be taxable, leaving roughly $4,800 after tax, well short of the family's $8,542 in monthly expenses even with Grace working. Disability before 65 is a more likely event than death for a man of 42. Grace has no disability coverage. Because her income is part time and her household services would continue in many disabling conditions, the plan gives her disability coverage lower priority than Daniel's, but it notes that some professional associations for dental hygienists offer group coverage at modest cost.

Health Coverage

The family's employer-sponsored PPO covers both spouses and children with a moderate deductible and an out-of-pocket maximum the emergency fund can absorb once it is rebuilt. The plan recommends keeping it. Switching to a high-deductible policy paired with a health savings account, an option raised in the tax section, would add risk the family cannot yet carry.

Property and Liability Coverage

The home's estimated replacement cost is about $380,000, but its dwelling coverage is $360,000, and its contents are insured only at actual cash value. The auto liability limits of $100,000 per person are low for a household with growing assets and, within six years, a teenage driver, and the family has no umbrella liability policy.

Long-Term Care

Long-term care insurance is not recommended yet. Brown and Finkelstein (2009) review evidence that relatively few people buy it, in part because of high loads on policies and the role of public coverage as a payer of last resort. The plan will revisit the question when Daniel and Grace reach their early fifties, when premiums and needs can be weighed more precisely.

Recommendations

Together the changes cost about $225 a month. That figure is close to the savings the tax section identified from adjusting withholding and the 529 deduction, so the household can absorb the protection without cutting its giving or its debt payoff schedule. Because the credit card payoff absorbs the surplus for the next ten months, the plan buys the life insurance first, since it is the largest and least affordable risk to leave uncovered, and adds the disability, property and liability changes as the cards are paid.

A Christian Perspective

In 1 Timothy 5:8 Paul treats neglect of one's own household as a denial of the faith itself (English Standard Version Bible, 2001/2016). Insurance is one modest way a parent provides beyond his or her own lifetime and working years. The aim is not fear but faithfulness: covering the risks that would devastate the family, at a cost that leaves room for generosity and saving, as Grable et al. (2012) and Lytton et al. (2012) frame the purpose of risk management.

References

Bernheim, B. D., Forni, L., Gokhale, J., & Kotlikoff, L. J. (2003). The mismatch between life insurance holdings and financial vulnerabilities: Evidence from the Health and Retirement Study. American Economic Review, 93(1), 354-365. https://doi.org/10.1257/000282803321455340

Brown, J. R., & Finkelstein, A. (2009). The private market for long-term care insurance in the United States: A review of the evidence. Journal of Risk and Insurance, 76(1), 5-29. https://doi.org/10.1111/j.1539-6975.2009.01286.x

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Grable, J. E., Klock, D. D., & Lytton, R. H. (2012). The case approach to financial planning: Bridging the gap between theory and practice (2nd ed.). The National Underwriter Company.

Lytton, R. H., Grable, J. E., & Klock, D. D. (2012). The process of financial planning: Developing a financial plan (2nd ed.). The National Underwriter Company.