Reference no: EM133492940

Case: Family Situation Tanya and Larry have been married for 15 years and they have a two year old daughter, Samantha. Family Member Birth Date Age as of January 1st Larry Braun June 30th 39 Tanya Braun May 15th 37 Samantha Braun April 1st 2 ? Employment Tanya and Larry are both career-oriented. Tanya continued to work full-time after Samantha was born and they have been fortunate that Tanya's mother, Greta, has cared for Samantha while Tanya and Larry work. Tanya owns and operates a specialty garden accessories shop, Grand Illusions, as a sole proprietor. Her storefront is located in a renovated house downtown, and she has owned the building for the last ten years. She has one part-time employee, but otherwise she manages the shop by herself, with some assistance from Larry and Greta. Her net income from the business was about $55,000 last year. It has been growing at about 10% each year and she expects that growth to continue. Her shop is located on the main floor of the building, and she rents the second floor to a custom framing business, bringing in net rental income of $6,000 each year. Since he graduated from college 18 years ago, Larry has been working his way up the ladder at ComBuild Inc., a construction company. His current salary is $62,000 and it has only been increasing by about 2% per year for the last four years. Larry has gone as far as he can go with this company and he wants to move on, perhaps by starting his own construction company. However, he feels that opportunities in his province are limited and he wants to relocate to southern Ontario, where several of their friends currently live.

Before changing jobs, Larry would like to take a one-year, full-time business course to supplement his work experience. The program begins in January of next year and finishes in December. Two years from today, in January, Larry expects to return to work (either as an employee or on a self-employed basis). While Larry's friend in Ontario has indicated that Larry might be able to work for him part-time, earning about $15,000 per year, Larry is worried about other sources of income during his period of study. They have another friend in Ontario who said she would be willing to take care of Samantha in her home, but this will cost about $6,000 each year. ? Personal Use Assets Tanya and Larry bought their house 14 years ago for $80,000 with a $20,000 downpayment; the home is registered in joint tenancy. They believe it is now worth about $140,000. Their household furnishings and personal belongings have been bought and paid for. In addition to their two personal vehicles, Larry is restoring an antique 1957 Chevrolet, which he believes could sell for about $14,000. Tanya collects artwork, including sculptures and paintings; her collection is currently valued at $50,000. ? Tax-paid Capital Tanya bought her store 12 years ago for $150,000 with $50,000 allocated to the land and $100,000 allocated to the building. She made a downpayment of $30,000. Her mother guaranteed the loan at that time.

The store mortgage is currently based on an effective annual rate of 7.25% and it is up for renewal in December in two years. The property was recently appraised at $220,000 ($70,000 for the land; $150,000 for the building) and the UCC of the building is $78,000. Her other business-related assets, including store furnishings and inventory, were valued at $45,000 at the end of last year. Larry has a small investment portfolio, consisting almost entirely of foreign equities, currently worth $36,000 with an ACB of $23,600. The only non-foreign property in this portfolio consists of shares in a labor-sponsored investment fund that he purchased two years ago. He paid $3,000 for the shares and they are still worth only $3,000. They have never provided him with any dividend income. In the year he made the LSIF investment, his home province provided a tax credit of 15% on new LSIF investments up to a maximum investment of $5,000. He also has a modest amount in GICs and money market funds. He has been adding about $1,000 a year to each in recent years

Retirement Assets Larry has been a vested member of his employer's defined contribution pension plan for the last 16 years. He and his employer each contribute 5% of his salary and there is currently about $148,000 in his RPP account. He has contributed regularly to his own RRSP and he has accumulated about $112,000 in his plan. During the last five years, he has been making contributions of $5,000 each year to a spousal RRSP for Tanya, accumulating about $27,000. As of the end of last year, Larry had no unused RRSP contribution room. Tanya, on the other hand, has not contributed very much to her RRSP and she has only $18,000 in her plan. At the end of last year, she had unused RRSP contribution room of $33,780.

Estate Planning Larry and Tanya drafted new wills just after Samantha was born and they have not changed them since that time. Basically, the wills leave all of their assets, other than their RRSPs, to each other and in the event of their simultaneous death, to Samantha in trust. They have named Samantha as the beneficiary of their RRSPs and their estates as the beneficiaries of their insurance policies. Larry has named Tanya as the beneficiary of his RPP. Neither of them has drafted a power of attorney. ? Insurance Larry has life, disability and group health insurance through his employer. The life insurance policy will pay twice Larry's salary and double that amount if he dies an accidental death. The disability plan provides long-term coverage (until retirement) and has a 120-day waiting period. Larry pays for the disability premiums through a regular deduction from his paycheque. The group health coverage covers 80% of standard dental work and prescription medication and provides limited coverage for things like glasses, chiropractic care, etc. As a result of the heavy physical labour early in his career, Larry's back sometimes gives him problems and he makes full use of the coverage. The Brauns are aware that this coverage will cease if Larry quits his job and returns to school. Tanya has purchased her own $150,000 term insurance policy. The policy includes a child life rider that covers Samantha for $20,000. Tanya does not have any disability insurance

ASSETS Liquid Assets joint chequing account 1,500 1,500 3,000 Larry's money market fund 6,000 6,000 Larry's GICs 6,250 6,250 13,750 1,500 15,250 Investment and Business Assets - Non-registered Tanya's store 220,000 220,000 Tanya's store furnishings and inventory 45,000 45,000 Larry's equity portfolio 36,000 36,000 36,000 265,000 301,000 Investment and Business Assets - Registered Larry's RPP 148,000 148,000 Larry's RRSP 112,000 112,000 Tanya's spousal RRSP 27,000 27,000 Tanya's RRSP 18,000 18,000 260,000 45,000 305,000 Personal Use Assets house 70,000 70,000 140,000 1957 Chevrolet 14,000 14,000 sculptures and paintings 50,000 50,000 personal vehicles 6,500 5,400 11,900 furnishings, personal belongings 19,500 19,500 39,000 110,000 144,900 254,900 TOTAL ASSETS 419,750 456,400 876,150

Short-term Liabilities credit cards 900 900 1,800 900 900 1,800 Long-term Liabilities mortgage on storefront 80,454 80,454 mortgage on house 13,725 13,725 27,450 13,725 94,179 107,904 estimated deferred taxes 108,940 45,881 154,801 Net Worth 296,185 315,460 611,645 TOTAL LIABILITIES AND NET WORTH 419,750 456,400 876,150 Statement of Cash Flow: Tanya and Larry Braun as of last year Cash Inflows $ Larry's salary 62,000 Tanya's self-employment income 55,000 Tanya's rental income 6,000 Larry's dividend income 500 Larry's interest income 475 Tanya's interest income 25 TOTAL CASH INFLOWS 124,000

income taxes 32,023 mortgage (interest only) 2,900 property taxes 1,800 home insurance 720 utilities 2,800 maintenance 1,200 landscaping 1,500 food 6,000 household expenses 3,200 telephone 720 personal care 1,500 clothing 5,000 transportation 4,500 entertainment 4,800 eating out 5,200 gifts and charitable donations 4,000 subscriptions and books 1,200 holidays 6,000 sports & music registrations 1,600 life insurance 540 sundry payroll deductions 600 interest on storefront 5,956 principal repayment on storefront 5,332 Larry's RPP contributions 3,100 Larry's spousal RRSP contributions 5,000 Tanya's RRSP contributions 1,500 additions to Larry's equity portfolio 2,000 additions to Larry's GICs and money market funds 2,250 interest on credit cards 294 parts for 1957 Chevy 1,500 new sculptures and paintings 2,000 house Mortgage principal 3,542 new home furnishings 3,000 TOTAL CASH OUTFLOWS 123,277

Question: How much life insurance would you recommend for Tanya using the capital- needs approach?