FIN 420 Week 3 Insurance and Risk Protection Example

What Would Happen to Maya? Sizing Life and Disability Coverage for a Two-Paycheck Family, Then Checking Health, Auto, Renters and Liability Insurance for Gaps

[Student Name]

University of Phoenix

FIN/420: Personal Financial Planning

Week 3 Assignment

[Instructor Name]

[Date]

The Whitfields, their coverage and all premiums are composites written for a model paper; insurance concepts, legal minimums and research findings come from the sources listed and are stated generally.

The Whitfields, the composite Phoenix couple, have the insurance that came with their jobs and their car loans: health coverage through Jasmine's dental practice, group life insurance of one year's salary through Andre's city job, auto policies at Arizona's minimum liability limits and nothing else. When a coworker of Andre's was injured and out of work for eight months, Jasmine asked what would happen to their family if something similar happened to either of them. Insurance is worth buying for losses a family cannot survive and worth skipping for losses it can, and only a list of risks shows which is which. This paper builds that list and the coverage to match.

The Process

Risk management follows four steps: identify the risks, estimate how often they occur and how large the loss would be, decide how to handle each one and review the choices over time (Kapoor et al., 2020). A risk can be avoided, reduced, retained or transferred to an insurer. Large, unlikely losses, such as a death or a lawsuit, are best transferred. Small, frequent losses, such as a cracked phone screen, are best retained, since insuring them costs more than paying for them.

Life Insurance Needs

If Andre died, Jasmine and Maya would lose his $64,000 income. The family estimates it would need about $45,000 a year of his contribution until Maya turns 22, or 18 years, less about $15,000 a year in Social Security survivor benefits for Maya while she is a minor, a figure the family should confirm with its own statement. The remaining $30,000 a year for 18 years, discounted at a 3 percent real rate, is worth about $412,000 today. Adding paying off the car loans and cards of about $37,000, $80,000 for Maya's education and $15,000 for final expenses gives about $544,000. Subtracting his group coverage of $64,000 and about $3,000 of savings leaves a need of about $477,000. A similar calculation for Jasmine, whose income is $54,000, gives about $410,000.

Term or Permanent?

Term insurance pays only if the insured dies within the term, but costs little. A healthy 34-year-old nonsmoker can typically buy a 20-year, $500,000 term policy for a few hundred dollars a year. Whole life insurance for the same amount would cost many times more because it includes a savings component. The family's need is temporary, falling as Maya grows and savings build, so 20-year term policies of $500,000 for Andre and $400,000 for Jasmine fit. Quotes came to about $27 and $21 a month.

Who Has Enough Coverage?

Bernheim et al. (2003) compared life insurance holdings with the financial losses that a death would cause in older households and found that coverage was poorly matched to need: many households facing large losses had little insurance, while others carried coverage they did not need. The Whitfields' group policy alone would have covered less than a fifth of Andre's need.

Disability: The Larger Risk

Federal estimates put the chance that a young worker becomes disabled before full retirement age at slightly more than one in four (Social Security Administration, 2024). A long disability can be more damaging than a death, because the disabled person still has living costs and may need care. Andre's city job includes long-term disability coverage replacing 60 percent of pay after 90 days. Jasmine has none. Her work depends on her hands and back, so she should buy an individual policy that pays if she cannot work as a hygienist, with a 90-day waiting period covered by the emergency fund. A quote for $2,700 a month of benefit to age 65 came to about $95 a month. Social Security disability benefits exist but have strict eligibility rules and may take months to begin.

Health Coverage

Jasmine's practice offers a traditional plan with a $1,000 deductible and a premium of $560 a month for family coverage, and a high-deductible plan with a $4,000 deductible and a $380 premium that allows a health savings account. With the family's typical medical spending of about $2,500 a year, the high-deductible plan costs less in an ordinary year: $4,560 of premiums plus $2,500 out of pocket against $6,720 of premiums plus about $1,300 out of pocket. In a bad year, both plans cap out-of-pocket costs, but the high-deductible cap is higher. Because contributions to a health savings account are tax deductible and can be invested for future medical costs, the couple chose the high-deductible plan and will put the $180 monthly premium savings into the account.

Auto and Liability

Arizona's minimum liability coverage is $25,000 per person and $50,000 per accident for injuries and $15,000 for property damage. A serious crash could produce claims far higher, and a court could reach future wages. The couple raised their limits to $100,000, $300,000 and $100,000, which added about $22 a month across both cars, and kept comprehensive and collision because the cars are financed. They raised their collision deductible from $250 to $1,000, which cut the premium by about $18 a month, a loss they can now absorb from the emergency fund.

Renters and Umbrella Coverage

Their belongings are not covered by the landlord's policy. A renters policy covering $30,000 of belongings plus $300,000 of personal liability was quoted near $15 monthly. An umbrella policy adding $1 million of liability above the auto and renters limits costs about $25 a month and protects their future earnings.

The Cost and the Budget

New premiums total about $27 and $21 for life insurance, $95 for Jasmine's disability, $22 for higher auto limits, $15 for renters and $25 for an umbrella, about $205 a month, minus $18 from the higher collision deductible, for about $187. The health plan switch saves $180 a month in premiums, which goes to the health savings account. The net cost of about $187 comes from the irregular-expense category, since several irregular costs are now insured.

What They Retain

The couple will not buy extended warranties, phone insurance or low deductibles, retaining those small losses from savings.

Conclusion

A list of risks showed that the Whitfields' biggest exposures were death, disability and liability, none adequately covered. Term life policies sized by need, disability coverage for Jasmine, higher liability limits and renters and umbrella policies fill those gaps for about $187 a month, while higher deductibles and a health savings account keep small losses where they belong.

References

Bernheim, B. D., Forni, L., Gokhale, J., & Kotlikoff, L. J. (2003). The mismatch between life insurance holdings and financial vulnerabilities: Evidence from the Health and Retirement Study. American Economic Review, 93(1), 354-365. https://doi.org/10.1257/000282803321455340

Kapoor, J. R., Dlabay, L. R., Hughes, R. J., & Hart, M. M. (2020). Personal finance (13th ed.). McGraw Hill Education.

Social Security Administration. (2024). Disability benefits (Publication No. 05-10029). https://www.ssa.gov/pubs/EN-05-10029.pdf