Problem
The following case study may better illustrate how a capital needs analysis would help a family determine the most appropriate amount of insurance for their personal situation.
Stan and Sarah Lanni are in their early 30s and have two young children. They each earn $55,000 at companies that do not provide any type of benefits. He has a $15,000 car loan and she has a $20,000 car loan, as well as a $100,000 mortgage. Stan and Sarah want to accumulate funds for retirement. They also place a high value on assisting their children with the cost of post-secondary education and want to leave them $28,000 each. They have $10,000 in the bank and RRSPs of $18,000 each. They do not want to liquidate their RRSPs if one of them dies. Stan and Sarah have $250,000 and $270,000 of group life insurance respectively, through their employers. They also each have a $150,000 term life insurance policy. They have estimated last expenses at $15,000 each and feel that 4 months of their combined salary should be adequate for emergencies.
They want to provide for each other and their children in the event of their premature death, but they are not sure they have enough insurance to accomplish this goal. They feel that any capital left on their death would earn 5% (discount rate). Prepare a capital needs analysis to determine what amount of life insurance is appropriate for both Stan and Sarah. Make and document any reasonable assumptions that may be required to complete the analysis.
Also, comment on any advice you would give them to improve their overall financial and insurance planning situation.