Case Study on Anthony and Fran Sinatra - Insurance Paper Example

FIN 671: Case Study- Anthony and Fran Sinatra

The following case study fact set provides you with the necessary information to identify risk management issues they face (individually and as a family) as they progress through their work life expectancy.

Anthony Sinatra, male age 22

Anthony recently graduated a prestigious private college with a Bachelors Degree in Geology and is in line for a job with a prominent oil and gas exploration company that works closely with his school. As a result he does not have to move and expects to earn $40,000/year as his initial salary.

Anthony owns a 2007 Honda Accord with 87,000 miles and rents an apartment for $700/mo. He worked during college to pay for some of his college tuition but still has student loans totaling $65,000. Other than some personal belongings such as clothing, furniture, his cell phone and computer, he lives a basic existence. He expects to earn annual pay raises at 4%, personal consumption of 25%, inflation to be 3% and earn an investment rate of 6.5%.

On his first day of work, he learns that he is entitled to health insurance, some basic life insurance of one time his salary and some form of disability coverage. He is a bit overwhelmed at the choices and needs guidance.

Part 1.

Question 1.

Since Anthony is single and has no dependents, list the potential risks that he faces at this time?

The potential risks faced by Antony include personal risks that include risks of premature death, risk of old age, risk of sickness, and risk of unemployment. Other risks include speculative risks, liability risks, property risks, fundamental risks, particular risks, static risks, and dynamic risks.

Question 2.

Based on the amount of group life insurance his company provides:

Would Anthony have to pay income tax on the basic life insurance he is provided with?

Since basic life insurance benefits are received upon the demise of the insured person, they dont have to be reported to the tax authorities. However, the interest that is accrued by the life insurance cover must be reported since it is taxable.

What additional amount of group insurance would you suggest he consider purchasing based on your answer in question

Antony should purchase general insurance to cover the other risks not included in life insurance. The policy should cover property loss, damage, theft, fire or destruction by natural calamities. Notably, for the Honda motorcycle, Antony should purchase liability insurance which covers collisions, personal injury, and comprehensive cover.

Question 3.

Anthony has a choice of a High Deductible plan or an HMO. He is very healthy and does not anticipate needing to go to the doctors that often.

What type of health insurance plan would you recommend and why?

The recommended health insurance plan for Antony is accident insurance because of the nature of his work. Although government regulations demands for oil and gas exploration firms to maintain high safety standards at their establishments, the industry is highly risky.

Do you recommend he take advantage of either a Flexible Savings Account (FSA) or Health Savings Account? Be sure to use the correct account based on the plan you have chosen for him.

Since Antony is already entitled to some form of basic health insurance, the recommendable option is the flexible saving accounts (FSA). A FSA account is not taxed and therefore the insurer can use save money that would have been set aside. Moreover, the account can be used to cater for out of pocket medical expenses.

Question 4.

His company offers basic long-term disability insurance that would cover 50% of his pay should he suffer a disability that is expected to keep him out of work for more than 1 month. Between rent, car insurance and his student loan payments, he does not have much left in the way of discretionary income.

Do you recommend he purchase additional group disability insurance from his employer or a disability policy of his own? Identify the pros or cons of your suggestion.

Antony should purchase individual group disability insurance because of the coverage stability. In view of Antony lack of discretionary income, the individual disability policy premiums and policy remain nontaxable, unchanged and transferable. On the downside, there are no tax benefits with individual disability insurance policy. Moreover, the employer disability policy is taxed therefore the overall dollars that is payable to the beneficiary reduces by about 10%.

Should he pay the premium with pre tax or after tax dollars? Why is this important?

Notably, Antony does not have discretionary income which and therefore he should pay his premiums with pretax dollars. Moreover, the after tax dollars are used to cover basic expenses such as loans and household bills (Sidney Kess, Edward, and Mendlowitz 49).

Question 5.

Given the information provided what other insurance if any, should Anthony consider purchasing?

If the limited amount of discretionary income that Antony is left with after tax is put into consideration and insurance deductions, Antony must not consider purchasing additional policies. In fact, Antony must cut on some of the insurance covers that have left him without any income.

While working at his job, Anthony now age 28, met Fran and got married. A few years later they had a child name Christine. Anthony continues to advance at the company which afforded Fran the luxury of being a stay at home mom. Anthony and Frans financial situation is now as follows:

They own a home with a $300,000 mortgage. Christine, now age 5, displays musical talents and Anthony and Fran are thinking of sending her to Julliard when she graduates high school.

They estimate the cost of 4 years of education to be $200,000. He is now fully insured with social security and is eligible for survivor benefits should he die, and is the process of reevaluating his insurance needs. He has since traded in his Honda for a 2016Audi A6, which he owes $31,000 and recently has leased a Ford Flex for Fran at $375.00 per month so she has room to take Christine to her music lessons and Christines friends to summer soccer camp.

Question 6.

Using the capital earnings approach, how much life insurance should Anthony now have on himself? What type of life insurance would you recommend and why?

Need=Ongoing IncomeOngoing Expenses/Rate Of Return+ (AssetsFinal Expenses)

300,000-200000/40,000=2.5(4,375)=10,937

Considering Antonys income and assets, the recommended type of life insurance is permanent or whole life cover. Using this policy, the benefits will only be payable upon the death of the insurer at whichever age. Since the insurer has a young family, whole life cover would grant him the chance to cater for the family when alive and after death.

Question 7.

Although Fran is not working, what financial impact if any would Anthony suffer if Fran were to predecease him? How much life insurance if any, should Fran have on her Life? What type of insurance would you recommend and why?

The financial impact that Antony would suffer if Frans was to predecease him includes child upkeep expenses, household care expenses and transport expenses. Since Fran is a stay home mother, the tasks she undertakes can be valued in terms of finance. When Fran dies, Antony will be forced to employs house helps, drivers, caretakers and other employees who will cover the tasks of the deceased wife.

Last year, Frans father health deteriorated due to severe arthritis to the point where he has difficulty with simple activities of daily living such as getting off the sofa, bathing and dressing. While Frans mom is able to care for Frans dad at home, Anthony now age 52, and Fran age 50, worry about their own long term care needs.

Christine has recently graduate high school and was accepted to Julliard. Anthony and Fran have defrayed a good amount of the college tuition by investing in a 529 Plan and expect Christine to have modest to below average student loans when she graduates. As a result, they are now able to turn their attention to retirement.

Anthony continues to enjoy growth and success at his firm and is in senior management. His salary is now $150,000. Together, they have accumulated the following assets.

$450,000 in retirement savings and expect another $300,000 by time he retires at 62.

$35,000 in bank savings

$110,000 after tax brokerage investments

He expects his raises to grow at 5% per year; inflation to be 4% and his consumption rate is now 35%. He has remained growth oriented with his investments and expects his investment rate until retirement to be 7.5%. They expect to have enough savings to support a comfortable retirement lifestyle, but decide they want to insure a legacy for Christine through the use of life insurance. This would free up capital for them to use during retirement or, for medical needs later in life.

Question 8.

Based on where they are now what amount of life insurance should Anthony now carry? Choose a calculation method and support your answer.

Using the capital needs or capital retention method to estimate the insurance need for Antony, final expenses and incoming needs are considered (Sidney Kess, Edward, and Mendlowitz 49).

Need=Ongoing IncomeOngoing Expenses/Rate Of Return+ (AssetsFinal Expenses)

150,000 52500/2.5 =39,000

Question 9.

Given their stated goal of leaving a legacy to Christine via the use of life insurance, what type of life insurance should be used for this goal?

Whole life insurance is ideal for Christine since upon the death of his parents all the insurance benefits will be paid to her. Considering the high premiums and annual salary that is awarded to Antony, the expected amount will be high. The large amount of benefits accrued after her parents death will enhance the familys legacy.

Question 10.

Anthony and Fran are very concerned about the impact of long-term care. Based on the level of assets they expect to have when Anthony retires at age 62:

Are the Sinatras a good candidate for long term care insurance or should they self-insure?

Generally, Sinatras major income is the salary recovered from his employment at the oil and gas exploration company. The level of assets owned by the family is very minimal and therefore, the Sinatras should select an insurance option that will is not very expensive. For this reason, the recommendable option is self insurance (Sidney Kess, Edward, and Mendlowitz 49).

What other risk management techniques or insurance programs should they consider at this time?

General management techniques for handling insurance risks include risk retention, risk control, risk avoidance contractual or noninsurance risk transfer, and insurance transfer. Other techniques include credit, operational, interest rate risks such as financial tools including hedges, swaps, and derivatives (Sidney Kess, Edward, and Mendlowitz 49).

Part 2.

Using the financial information preceding question 6, find a life insurance calculator of your choice on the web and compare the suggested amount of insurance to the results of the Capital Earnings approach in question 8.

Copy the URL web address for the tool you used

https://us.axa.com/tools/calculators/life-insurance-calculator.htmlAttach print screens of the input and results page

Age-52

Current income=150,000

Other unpaid services=895,000

Analyze and compare the difference in recommend amounts of coverage in question 6, and discuss why you feel it is accurate or not.

The difference between the recommended amounts for life insurance cover need arise from the difference in rates of inflation, and the expected investment. The online calculator does not accommodate the values for inflation and expected income on investment.

What other data if any do you feel the tool required that was not contained in the Sinatra fact set?

The tool should be ad...