Question

3. Insurance

a) Michael says, “I and Mary are in good health and fairly young, we don’t think we need any life

insurance.” Evaluate the above statement considering his family’s situation.

b) Calculate how much life insurance you suggest Michael should buy.

c) Identify one policy (How long, how much, type) and the company (Eg, Geico, State Farm, MetLife)

that Michael should buy life insurance from.

Michael and Mary Gordon Family Michael and Mary Gordon are developing a financial plan to accomplish their goals and objectives. They have great aspirations for the future, however are concerned about their current financial situation. Assume today's date is January 1, 2017 Personal Background and Information Michael Gordon (Age 32): Michael is a Vice President of business development at Cornerstone, LLC, a company that helps firms with their digital presence. He has been employed there since its founding, 8 years ago. The company faces heavy competition and its profitability has been erratic. His job however, is fairly secure. His annual salary is $85,000. He is entitled to a performance bonus of 20-30% of his salary. Owing to industry conditions and poor company profitability, no bonus was paid for the last two years. He is in good health with no history of illness and has never smoked. Mary Gordon (Age 30): Up until Sam was born, Mary was a web designer at a digital design company. She is uncertain when she will return to work. She is in good health with no history of illness and has never smoked. The Gordons: Michael and Mary have been married for 7 years. They have two children, Max and Sam. Michael's mother, Carol lives with the Gordons. They have a no criminal record and have a clean financial history. Family Max is 6 years old and is in 1st grade. He goes to a public school near where the Gordons live. He has shown a strong interest in music and his parents are considering enrolling him for music lessons. Sam is 4 years old. She attends pre-school. Carol, 68 years, is Michael's mother. She had a heart attack two years ago, and has been living with the Gordons since she left the hospital. She is retired and uses income from her investments and social security income to meet her living expenses. She did not qualify as a dependent of the Gordons (For Tax purposes) in 2016. She is concerned that her investments may not perform well in the future and Michael and Mary may have to provide financial support. John and Jessica Paulson are Mary's parents. They are in good health and have offered to help pay for Max and Sam's tuition through the eighth grade, if required. They are retired, financially secure and travel often. Mary is their only child. Other Financial Details Michael and Mary have FICO Scores of 710 each. They expect their investment portfolio to earn 8% over the long term They file their taxes 'Married Filing Jointly'. They take the standard deduction, have 4 exemptions and have child tax credit for each of their two children. Michael has a 401(K) plan at work. His company matches his contributions up to 3% of his salary.

Answer 1

Answer to a)

Based on the income and the family characteristics, I do consider necessary that Michael and his wife buy life insurance.The family depends heavily on his earnings and they have a scarce liquidity for any urgency. Besides, his family background indicates the potential risk of health issues even though his current health condition is fine.

Another worrying fact is the unstable performance of the company which impacts directly the extra income that Michael is entitled to. This increases the vulnerability of the family in the face of a potential health emergency.

The insurance might be indirectly acquired with the help of the grantparents (Mary´s parents) due to the "savings" in the tuition fees as they are willing to pay for them along some years.