Reference no: EM133018339

Question - David is an electrician who has recently started his own business and earns $110,000. His wife, Mary, works part-time as a consulting engineer and earns $25,000. David is aged 45 and Mary is 39. They have two children: Julie, aged 4, and Percy, aged 12. David and Marry wish for all their children to receive a university education. To provide for this, they estimate that $100,000 should be set aside. The children would be dependents until they turn 25.

The family's basic living expenses are $2,500 per month. In addition, for each family member (including parents), this will increase by $1,100 per person. They have a mortgage of $250,000 on their home, which has a current market value of $600,000. Credit cards, personal loans and other outstanding debts amount to $30,000. David has a 2018 model car, which is leased and has $25,000 outstanding on it at present. Mary has a 2011 model van so that she can transport the children to school and their other activities. Her van is valued at $8,000 and is fully paid for. Expenses including funeral, legal and medical are expected to amount to $20,000. Additionally, they believe they need emergency funds of $22,000.

David has an accumulated superannuation fund, which has a balance of $200,000. Mary also has a personal superannuation account, which will provide her with sufficient funding once she can access it at age 65. David currently has a life insurance policy for a lump sum of $300,000 with Mary named as the beneficiary. Mary does not have any life insurance cover. Assume David's life expectancy is 84 years and Mary's is 86.

Required -

-How much is the appropriate amount of life insurance cover required to provide for the family's future needs in the event of David's death?

-If the investment rate is 2.5%, how much is the amount of life insurance cover required, using the multiple approach in the event of David's death?

-The use of the multiple approach for calculating a lump sum benefit to be taken out pursuant to a life insurance policy has been strongly criticised as being too simplistic in nature. Outline the basis for such criticism.

-As a financial advisor, you find David and Mary reluctant to purchase an additional life insurance policy. Briefly discuss with them the importance of adequate life insurance in a financial plan.