Reference no: EM13336125

The Sheehan Insurance Case

Ken and Sandra consider themselves middle Americans � with a small but positive cash flow and a modest net worth. Ken, age 63, is just a few years away from retirement whereas Sandra, age 61, plans to work a few more years once Ken officially retires. The following discussion provides a summary of the Sheehans� insurance planning situation.

Life Insurance

Ken owns a $250,000 universal life insurance policy. Sandra is the insured and their son Wilbur, age 37, is the beneficiary. The policy has a cash value of $23,450 and of living benefits provision; all account earnings are used to offset premium expenses. Sandra 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

Ken and Sandra own a home as JTWROS that has a market and replacement value of $245,000. The house is insured with the standard HO-3 policy for $210,700. The policy requires that the Sheehans pay a $500 deductible per claim occurrence. Other provisions include the following:

10% coverage 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 expenses coverage for six months

Coverage up to $100,000 for personal liability

A replacement cost coverage endorsement is in place

The Sheehans two cars are insured under a personal automobile policy with split limit coverage of 250,000/500,000/50,000. They also have a $1 million excess liability policy.

 

Health insurance

The Sheehans are covered under Sandra�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, Ken is exploring his Social Security and Medicare insurance coverage. Which of the following is (are) a benefit provided by Medicare? Justify your answer.

A. Hospice benefits for terminally ill persons.

B. A stop-loss limit for annual medical expenses in excess of $2500.

C. Coverage for custodial care.

D. Coverage for nonprescription drugs.

2. Ken is considering purchasing a 12-year-old pickup truck for use when he goes hunting. The truck that he has his eye on has 90,000 miles but is in generally good condition. Which of the following insurance coverages should Ken probably exclude when purchasing an insurance policy for this truck? Justify your answer.

A. Liability coverage.

B. Medical payments coverage.

C. Uninsured motorist coverage

D. Damage to insured�s auto coverage.

3. If Sandra were to die today, which of the following (if any) is true in relation to the $250,000 universal life insurance policy owned by Ken? Justify your answer.

A. Ken will continue to own the policy for the benefit of Wilbur.

B. Ken will make a taxable gift of life insurance proceeds to Wilbur.

C. Ken will receive an amount equal to the cash value, and Wilbur receive the remainder of the life insurance value as a tax-free gift.

D. Ken will receive the proceeds of the policy.

E. Ken must include the $250,000 face value of the policy as an asset when he calculates Sandra�s taxable estate.

4. What will be the result if Sandra decides to cancel her term life insurance policy? Justify your answer.

A. She will incur a $2,250 tax liability based on the level of premiums paid over the past five years.

B. She will receive $450 in premiums paid for last year�s coverage as a refund from the insurance company, and this amount will be taxable at the federal level.

C. She will not have a tax liability associated with the cancellation.

D. She would incur tax liability on the face amount received if she were to die after canceling the policy but before receiving refunded premiums.

5. If the Sheehans sustain an $80,000 loss to their dwelling from a fire, how much will the insurance company pay (after the deductible) toward the dwelling loss claim? Justify your answer. Show all computations.

A. $64,000

B. $68,000

C. $79,500

D. $80,000

 

6. If a shed valued at $13,000 in the backyard is also destroyed in the fire, what is the maximum amount that the insurance company will pay prior to the deductible to replace the shed and any other detached dwellings? Justify your answer. Show all calculations.

A. $225,000

B. $25,000

C. $21,070

D. $13,000

E. $1300

7. Sandra believes that her husband is a reckless driver. She worries about what would happen if he were ever in a serious car accident. If Ken is involved in a car accident and causes physical harm to another motorist in the amount of $300,000, how much will be paid from the personal automobile policy (PAP) and how much from the excess liability policy? Show your computations.

A. $300,000 PAP and $0 excess liability

B. $0 PAP and $300,000 excess liability

C. $150,000 PAP and $150,000 excess liability

D. $50,000 PAP and $250,000 excess liability

E. $250,000 PAP and $50,000 excess liability

8. How much will the Sheehans health insurance company pay if Sandra files a claim for a broken foot that cost $2,000 for emergency room treatment, $700 for bone setting, and $300 in rehabilitation services? Show your computations.

A. $0

B. $500

C. $2000

D. $2500

E. $3000

9. The Sheehans are curious about the alternatives available when planning for possible nursing home care costs in the future. Which of the following long-term care insurance strategies is/are appropriate financial planning alternatives for the Sheehans? Justify your response(s).

A. Use the living benefits provision within an accelerated death benefit rider available in the universal life insurance policy.

B. Purchase a life insurance policy that has a long-term care insurance endorsement.

C. Systematically save for future health care costs and use Medicare as the primary insurance coverage for long-term care expenses.

D. Use Medicaid coverage for long-term care expenses after age 65.

10. Currently neither Ken nor Sandra has disability insurance coverage. Ken and Sandra would like more information from you about disability insurance. Which of the following statements is true in relation to disability insurance? Justify your answer.

A. Shorter elimination periods result in lower premium costs.

B. Benefits paid from employer-provided group disability plans are received income tax-free.

C. If a guaranteed renewable contract is used, the insurance company cannot increase premiums on individual policies but can raise premiums for all individuals covered by that policy.

D. Disability policies are nearly always designed to provide lifetime benefits.