The Smith Case complete solutions correct answers key

Kevin and Sonya Smith are conducting an insurance review with you, their financial planner. Kevin and Sonya consider themselves middle-Americans with small but positive cash flow and a modest net worth. Kevin (age 63) is just a few years away from retirement, whereas Sonya (age 61) plans to work a few more years once Kevin officially retires. The following discussion provides a summary of the Smith’s insurance planning situation.

Life insurance

Kevin owns a $250,000 universal life insurance policy. Sonya is the insured and their son Wilbur (age 37) is the beneficiary. The policy has a cash value of $23,450 and a living benefits provision; all account earnings are used to offset premium expenses. Sonya owns a 20 year $100,000 level term life policy that she purchased five years ago. She pays approximately $450 per year in premium costs.

Property and casualty insurance

Kevin and Sonya own a home as joint tenants with rights of survivor. The home has a market and replacement value of $245,000. The house is insured with a standard HO – 3 policy for $210,700. The policy requires that the Smith’s pay $500 deductible per claim occurrence. Other provisions include the following:

·         10% on detached structures

·         coverage up to $250 for cash

·         coverage up to $1500 for collectibles, artwork, and similar assets

·         personal property contents coverage equal to 20% of the insured dwelling

·         living expense coverage for six months

·         coverage up to $100,000 for personal liability

·         a replacement cost coverage endorsement is in place

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The Smith’s two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a one million-dollar excess liability policy.

Health insurance

The Smiths are covered under Sonya’s group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $1 million for the family, a $500 per person deductible, and an 80% coinsurance clause, with the family stop-loss limit of $2500.

Use the preceding case information to answer the questions that follow.

1. In preparation for retirement, Kevin is exploring his Social Security and Medicare insurance coverage. He is wondering if the following items are covered:

·         hospice benefits in case he becomes terminally ill

·         medical expenses in excess of $2500 new

·         coverage should he require custodial care

·         coverage for nonprescription drugs

Please advise Kevin as to the coverage provided by Social Security and Medicare for the above items. Also advise him about alternatives that he may elect to cover any shortages.

2. Kevin is considering purchasing a 12-year-old pickup truck for use when he goes hunting. The truck he has a Zion has 90,000 miles but is in generally good condition. What insurance coverage should Kevin include when purchasing an insurance policy for this truck? Please discuss liability coverage, medical payments coverage, uninsured motorist, and damage to insured’s auto.

3. If Sonya were to die today, what would happen in relation to the $250,000 universal life insurance policy owned by Kevin? Consider whether or not a taxable gift would be made. Determine who would receive any benefits, and whether or not the benefits would be taxable. As a result of your analysis, would you recommend any changes to the ownership of this policy?

4. Describe the results that might occur if Sonya decides to cancel her term life insurance policy. Would she incur any penalties? Would she incur any tax liability?

5. If the Smiths sustain and $80,000 loss to their home from a fire, how much will the insurance company pay if the Smith’s file a loss claim? (Provide the detailed justification for your response.)

6. The Smiths have a tool shed in their backyard which is valued at $13,000. If the shed is destroyed by fire, how much will the insurance company pay, prior to the deductible, to replace the shed and any other detached dwellings? (Provide the detailed justification for your response.)

7. If either Kevin or Sonja is involved in a serious car accident and causes physical harm to another motorist, how much will the insurance company pay from their personal automobile policy? How much would be paid from their excess liability policy? (Provide the detailed justification for your response.)

8. If Kevin falls and suffers a broken ankle, how much will the health insurance company pay for the following expenses: $2000 for emergency room treatment, $700 for x-rays, and $300 for rehabilitation services?

9. The Smiths are concerned about the possibility of needing nursing home care in the future. They are wondering whether or not Medicare or Medicaid would provide coverage for them and are considering purchasing long-term care insurance. Briefly discuss their options, including Social Security, Medicare, Medicaid, and or private long-term care insurance.

10. Kevin and Sonya currently have no disability insurance coverage. They have asked you to provide them with more information and a recommendation about whether or not they should purchase this kind of insurance. They are particularly concerned about whether or not the benefits would be taxable. Briefly describe how the coverage that might benefit them, including how long they would be covered, the taxation of benefits, and the effect of a short or long elimination period.