The HammondsInsurance Case
Mike and Molly consider themselves middle Americans – with a small but positive cash flow and a modest net worth. Mike, age 63, is just a few years away from retirement whereas Molly, age 61, plans to work a few more years once Mike officially retires. The following discussion provides a summary of the Hammonds’ insurance planning situation.
Mike owns a $350,000 universal life insurance policy. Molly is the insured and their son Robert, age 37, is the beneficiary. The policy has a cash value of $33,450 and of living benefits provision; all account earnings are used to offset premium expenses. Molly owns a 20 year $200,000 level term life policy that she purchased five years ago. She pays approximately $650 per year in premium costs.
Property and casualty insurance
Mike and Molly own a home as JTWROS that has a market and replacement value of $275,000. The house is insured with the standard HO-3 policy for $225,700. The policy requires that the Hammonds 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 $1,500 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 Hammonds’ 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.
The Hammonds are covered under Molly’s group health insurance plan. The traditional plan has a lifetime maximum benefit equal to $5 million for the family, a $500 per person deductible, and an 80% coinsurance clause, with the family stop-loss limit of $2,500.
Use the preceding case information to answer the questions that follow.
1. In preparation for retirement, Mike is exploring his Social Security and Medicare insurance coverage. Which of the following is (are)a benefit provided by Medicare?
1A. Hospice benefits for terminally ill persons.
1B. A stop-loss limit for annual medical expenses in excess of $2500.
1C. Coverage for custodial care.
1D. Coverage for nonprescription drugs.
2. Mike 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 Mike probably exclude when purchasing an insurance policy for this truck?
2A. Liability coverage.
2B. Medical payments coverage.
2C. Uninsured motorist coverage
2D. Damage to insured’s auto coverage.
3. If Molly were to die today, which of the following (if any) is true in relation to the $350,000 universal life insurance policy owned by Mike? Justify your answer.
3A. Mike will continue to own the policy for the benefit of Robert.
3B. Mike will make a taxable gift of life insurance proceeds to Robert.
3C. Mike will receive an amount equal to the cash value, and Robert will receive the remainder of the life insurance value as a tax-free gift.
3D. Mike will receive the proceeds of the policy.
3E. Mike must include the $350,000 face value of the policy as an asset when he calculates Molly’s taxable estate.
4. What will be the result if Molly decides to cancel her term life insurance policy? Justify your answer.
4A. She will incur a $3,250 tax liability based on the level of premiums paid over the past five years.
4B. She will receive $650 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.
4C. She will not have a tax liability associated with the cancellation.
4D. 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 Hammonds 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? Show all computations.
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? Show all calculations.
7. Molly believes that her husband is a reckless driver. She worries about what would happen if he were ever in a serious car accident. If Mike 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.
7A. $300,000 PAP and $0 excess liability
7B. $0 PAP and $300,000 excess liability
7C. $150,000 PAP and $150,000 excess liability
7D. $50,000 PAP and $250,000 excess liability
7E. $250,000 PAP and $50,000 excess liability
8. How much will the Hammonds’ health insurance company pay if Molly 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.
9. The Hammonds 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).
9A. Use the living benefits provision within an accelerated death benefit rider available in the universal life insurance policy.
9B. Purchase a life insurance policy that has a long-term care insurance endorsement.
9C. Systematically save for future health care costs and use Medicare as the primary insurance coverage for long-term care expenses.
9D. Use Medicaid coverage for long-term care expenses after age 65.
10. Currently, neither Mike nor Molly has disability insurance coverage. Mike and Molly would like more information from you about disability insurance. Which of the following statements is true in relation to disability insurance?
10A. Shorter elimination periods result in lower premium costs.
10B. Benefits paid from employer-provided group disability plans are received income tax-free.
10C. 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.
10D. Disability policies are nearly always designed to provide lifetime benefits.