case III – Nelson Case Any of irrelevant information to the question below, you
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case III – Nelson Case
Any of irrelevant information to the question below, you can ignore from the description.
This case is updated or continued from the first case study in week 7.
Peter Nelson, age 36, and Connie Nelson, age 34, are married with 2 children, Robert,
age 4, and Mary, age 2. Peter is a senior executive with Mega Corporation where he has
an extensive benefits package including an endorsement method split-dollar life
insurance plan, group disability income insurance, group long-term care insurance, group
term life insurance ($70,000), nonqualified deferred compensation, stock options, group
dental and vision insurance, a Section 401(k) plan, and group medical expense
insurance.
Connie has a middle management administrative position with the local school district.
She also enjoys a generous benefit package from her employer, including medical
expense, dental, vision, group term life, and disability income insurance. The principal
benefit to Connie is the dependent care assistance plan offered by her employer. She
takes Robert and Mary to a dependent care program on her way to work and picks them
up on her way home. Also, she is working on her MBA degree under her employer’s
educational assistance plan.
Peter and Connie have an HO-3 homeowners policy on their home in the amount of
$200,000, adequate coverage on their 2 autos, and a personal liability umbrella policy
(PLUP) for $2 million. They have accumulated an emergency fund of $12,000 and a
deferred variable annuity in the amount of $125,000, which are both jointly owned.
Peter and Connie are concerned that if Peter dies prematurely, adequate funds would not
be available to provide his dependents with income until Mary is age 18. Peter’s current
net pay is $3,900 per month, whereas Connie’s monthly net pay is $2,600. They estimate
the survivors would need about $5,500 per month to maintain their current standard of
living in the event Peter dies. The Nelsons believe they can earn an aftertax yield of 8%
annually on their investments and inflation will average 4% per year.
Question III-1.
Under Peter’s group disability income insurance plan, the definition of
disability that provides the most favorable protection for Peter would be one that defines
disability as:
A.
the inability of the insured to engage in any occupation.
B.
the inability of the insured to engage in his own occupation.
C.
the inability of the insured to engage in his own occupation and not working in
any gainful employment.
D.
the inability of the insured to engage in any reasonable occupation for which he is
or might easily become qualified.
Question III-2
. The Nelsons had a kitchen fire that caused extensive damage to their
dwelling. The cost of repairing the damage is $40,000. At the time of the loss, the limit
on the dwelling under the Nelson’s policy was $200,000, but the adjuster estimates the
replacement cost to be $250,000. How much of the loss will the Nelsons recover from
their insurance company?
A.
The Nelsons will collect $32,000, minus the deductible.
B.
The cost of the repairs is covered in full, minus the deductible.
C.
The Nelsons will collect $40,000 if the policy includes the replacement cost
endorsement.
D.
The Nelsons violated the replacement cost provision and only the actual cash
value of the loss will be paid, minus the deductible.
Question III-3.
Peter’s father, who lives nearby, has been totally and permanently
disabled for the past 3 years. He is a widower and receives $6,000 in annual long-term
disability benefits from his employer’s group disability income plan. While he was actively
employed, he was required to pay 40% of the cost of his coverage under the employer
plan. How much of Peter’s father’s disability benefit from the employer’s plan is
includible in his gross income for federal income tax purposes?
A.
$0
B.
$2,400
C.
$3,600
D.
$6,000
Question III-4
. Peter has $70,000 of protection under his employer’s group term life
insurance plan, for which he makes a monthly contribution of $1.50. Connie is the named
beneficiary. The actual cost to the employer for his protection is $.20 per month per
$1,000 of insurance, and the uniform premium for group term insurance under the
Internal Revenue Code is $.09 per month per $1,000 of insurance. Under Section 79,
what is the annual amount that Peter, who is not a key employee, must report for federal
income tax purposes because of his group term insurance protection?
A.
$3.60
B.
$30.00
C.
$21.60
D.
$57.60
Explanation / Answer
Answer Option A: I only
(Under Split-dollar insurance plan, the owner is the employer and employer is not entitled to tax deduction)
Question II: Answer Option B: the amount of growth during the accumulation stage is uncertain
(In Variable defered annuity the growth is uncertain since the investment vehicle which is equity will not give a fixed return)
Question III: Answer:D:All of the above
(Since they do have a dependecy care fund, neither an education plan, so its all the above)
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