Wealth Grounding – Foundational Part

Wealth Grounding – Foundational Part

Family Situation

“Outer Space,” 33, and “Tight Space,” 29, have been married for 3 years. They have a daughter (3 years old) “Partial Space,” who suffers from cerebral palsy, a medical condition that requires her to be wheelchair-bound. Her current education is managed by the Spastic Children’s Association School (SCAS). They also have a son aged 2 and now “Tight Space” is expecting their third child, a daughter, in August 2020. They do not intend to have any more children.

“Tight Space’s” parents:

“Tight Space’s” father passed away recently. Her mother is healthy.

“Outer Space’s” parents:

“Outer Space’s” mother is 60 years old, is the only parent that he has, and resides with “Outer Space” and “Tight Space.” “Outer Space” provides her with an annual allowance of $6,000.

Financial Ratios

Basic Liquidity Ratio22 months
Debt Service Ratio13.37%
Liquid Assets To Net worth Ratio39.04%
Net Investment Asset to NW Ratio37.11%
Debt-to-Asset Ratio43.15%

Employment Status (Current – 2019)

“Outer Space” is a self-employed Architectural Designer. For the last 5 years, he has drawn an average annual gross income of $78,000 and he has managed to save about $3,000 per month from 2015 till 2019. “Tight Space” is a Sales & Marketing Manager in a brand management company. She earns an annual gross income of $42,000 with a 1-month bonus.

Question 1 Wealth Grounding – Foundational Part

1(a) From this case study, you are to construct “Outer Space” and “Tight Space’s” Cash Flow Statement for 2019 to demonstrate to them the importance of creating a surplus budget.

1(b) From this case study, you are to construct “Outer Space” and ‘Tight Space’s” Net worth Statement for 2019 to demonstrate to them their current financial health.

1(c) Based on the Financial statements constructed above, you are to compute and outline how the gambling debt has impacted “Outer Space’s” 5 Financial Ratios. Demonstrate and briefly explain its importance in understanding their financial health (Hint: compute and compare financial ratios before and after gambling debts):

  1. Basic Liquidity Ratio
  2. Debt Service Ratio
  3. Liquid Asset to Net Worth Rati
  4. Net investment Asset to Net Worth Ratio
  5. Debt to Asset Ratio

1(d) State 3 possible financial impacts of “Outer Space’s” gambling debt.

Question 2 Wealth Protection – Insurance Planning

2(a) Select the CORRECT answer for the following statements:

1. Which one of the following is an accepted definition of disability?

  • A person who is not willing to return to work.
  • A person who is completely unable to work at his or her own occupation.
  • A person who was previously totally disabled returns to work, but at a reduced salary, due to the inability to perform all prior job functions.
  • A previously disabled person who returns to work, but is not happy with changed duties.

2. The primary purpose of supplemental medical insurance is to do which one of the following?

  • Provide coverage for the large medical expenses that could become financially damaging with a serious injury or long-term illness.
  • Provide hospital services for a certain number of days rather than cash payments.
  • Pay for the cost of surgical procedures and non-surgical doctor’s fees.
  • Reimburse the patient for some or all of the hospital expenses.

3. Which of the following are life insurance bonus options?

VI. The bonus can be reverted back to the policy to enhance coverage and maturity value.
VII. The bonus can be applied to future premium payments.
VIII. Can be taken as a cash bonus.
IX. Maturity or terminal bonus – pays a bonus if the policy is kept to maturity or death providing premiums are continued.

  • I, II and III only
  • I, III and IV only
  • II, III, and IV only
  • I, II, III, and IV only

4. Which of the following are included in the standard provisions of a life insurance contract?

  1. There must be a grace period of 30 days or one month.
  2. The policy shall be contestable only during the first two years.
  3. The policy shall constitute an entire contract
  4. Misstatement of age does not affect the amount of insurance coverage or premium payable.
  • I and II only
  • I and III only
  • I, II and III only
  • I, III and IV only

5. Why is death a transferable risk?

  • Because it is certain that we will die.
  • Because there is a chance that we will not die.
  • Because we are not certain when we will die.
  • Because we might not have enough private savings to meet our obligations.

6. Which of the following is NOT an advantage of an Investment-Linked plan?

  • Small investors have an opportunity to invest in a large and diversified portfolio.
  • All cash values are guaranteed.
  • Assets for ILP funds are carefully selected by professional investment managers.
  • The policyholder achieves a level of flexibility not available with a traditional life plan.

7. Which mode of premium payment is most likely to suit a young married man with limited income?

  • Regular Monthly
  • Regular Annual
  • Single premium
  • Recurring single premium

8. Which of the following will not concern an actuary when he is setting premium rates?

  • Smoking status
  • Financial means
  • Investment income
  • Frequency of premium payment

2(b)(i) Describe who will receive the policy proceeds upon the demise of “Outer Space” for his respective policies with “Trust Nomination” and “Revocable Nomination.”

2(b)(ii) Illustrate and explain what happens to the policy proceeds when the nominees die before “Outer Space” for his policies with “Trust Nomination” and “Revocable Nomination.”

2(c)(i) What provision will “Tight Space’s” insurance company use to keep her $40,000 whole life participating policy in force?

2(c)(ii) “Tight Space” and “Neither Space” might use three risk management techniques (i.e. risk avoidance, risk reduction, and risk retention) to deal with the problem of numerous broken windows. For each risk management technique, state the action required and the potential result.

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