Risk Management and Insurance | Blackboard Masters



Risk Management and Insurance

Case Study




Today is January 1, 2017. Nicholas and Whitney Clement have come to you, a financial planner, to help in developing a plan to accomplish their financial goals. From your initial meeting together, you have gathered the following information.



Personal Background and Information


Nicholas Clement (Age 27)

Nicholas is an assistant in the marketing department for Energy Tech, Inc., a small company with 15 employees. His annual salary is $39,000.


Whitney Clement (Age 24)

Whitney is a legal research assistant with the law firm of Laurent, Heine & Merritt, LLC. Her annual salary is $30,000.


The Children

Nicholas and Whitney have no children from this marriage. Nicholas has two children, Grant, age 4, and Blake, age 3, from a former marriage. Grant and Blake live with their mother, Kelly.


The Clements

Nicholas and Whitney have been married for two years. Nicholas must pay $500 per month in child support until both Grant and Blake reach age 18. The divorce decree also required Nicholas to create an insurance trust for the benefit of the children and contribute $175 per month to the trust. The trustee is Kelly’s father. There are no withdrawal powers on the part of the beneficiaries. The proceeds of the trust are to be used for the education and maintenance of the children in the event of Nicholas’s death. The trustee has the power to invade any trust principal for the beneficiaries at the earlier of the death of Nicholas or Blake reaching age 18.



Economic Information

· Their salaries should increase 5% annually.

· The after tax investment rate of return is 6%.

· There is no state income tax.

· Their marginal tax rate is 15%.


Insurance Information


Life Insurance


  Policy A Policy B Policy C
Insured Nicholas Nicholas Whitney
Face amount $250,000 $117,0002 $30,000
Type Whole life Group term Group term
Cash value $2,000 $0 $0
Annual premium $2,100 $267 $75
Who pays premium Trustee Employer Employer
Beneficiary Trust1 Kelly Nicholas
Policyowner Trust Nicholas Whitney


1Grant and Blake are beneficiaries of the trust.

2This was increased from $50,000 to $117,000 January 1, 2017,



Group Term Life Insurance Coverage Cost Per $1,000 of protection for 1 Month
Under age 25 $0.05
Age 2 to 29 $0.06



Health Insurance

Nicholas and Whitney are covered under Nicholas’s employer plan, which is a major medical plan with a $200 per person deductible, 80/20 coinsurance provision, and family annual stop loss limit of $1,500.


Long Term Disability Insurance

Nicholas is covered by an own-occupation policy with premiums paid by his employer. The monthly benefit is equal to 60% of his gross pay after an elimination period of 180 days and is payable to age 65. The policy covers both sickness and accidents and is guaranteed renewable. Whitney is not covered by disability insurance.


Renter Insurance

The Clements have a HO-4 renter’s policy without endorsements. Contents coverage: $25,000; liability: $100,000.









Automobile Insurance

Both car and truck*



Type Personal Auto Policy
Bodily injury $25,000/$50,000
Property damage $10,000
Medical payments $5,000 per person
Uninsured motorist $25,000/$50,000
Comprehensive deductible $200
Collision deductible $500
Premium (annual) $4,950


*The Clements do not have any additional insurance on Whitney’s motorcycle.



Information Regarding Assets and Liabilities


Home Furnishings

The furniture was originally purchased with 20% down and 18% interest over 36

months. The monthly payment is $162.69.



The automobile was purchased January 1, 2016, for $26,474 with 20% down and

80% financed over 60 months with payments of $450 per month.


Sound System

The Clements have a fabulous sound system with a fair market value of $10,000.

They asked and received permission to alter their apartment to build speakers into

every room. The agreement with the landlord requires the Clements to leave the

speakers if they move because the speakers are permanently installed and affixed to

the property. The replacement value of the installed speakers is $4,500, and the non-

installed components are valued at $5,500. The system was purchased with cash last

year for $10,000.






1. What does guaranteed renewable mean with regard to Nicholas’s disability policy?


2. What are the deficiencies in the Clements’ disability insurance coverage?


3. If the Clements wanted to cover their personal property for replacement value, what would they need to do?


4. If the Clements were burglarized and had their movable sound system components stolen, would it be covered under the HO-4 policy, and if so, for what value?


5. If there was a fire in the Clements’ apartment building and their in-wall speaker system was destroyed, would they be covered under the HO-4 policy, and if so, to what extent?


6. If a fire forced the Clements to move out of their apartment for a month, would the HO-4 policy provide any coverage?


7. Is Whitney covered for liability under the personal auto policy while driving her motorcycle?


8. Who will actually collect the proceeds of Nicholas’s term life insurance if he were to die today, given that the Clements live in a Uniform Probate Code state?


9. How much must Nicholas’s employer include in Nicholas’s W-2 for 2016 for the group term life insurance? How much must be included in 2017?


10. Whitney sustains injuries while playing with Grant and Blake. Medical expenses totaled $1,600. The insurance company paid medical expenses in what amount? (Assume that the Clements had no other 2017 medical claims this year prior to this claim.)


11. Using a human life value approach net of federal and state income taxes, how much additional life insurance is needed on Nicholas’s life? (Round to the nearest $50,000 and assume that the marginal tax rate remains constant.)


12. Assume that Nicholas is in a serious automobile accident and is unable to perform the duties of his occupation for 208 consecutive days. What benefits will he receive under his long-term disability insurance policy? What will be the income tax consequences of receiving these benefits?


13. Assume that Nicholas is laid off from his job at Energy Tech, Inc. typically, how many months of continuation health insurance coverage are the Clements entitled to under COBRA? If Nicholas and Whitney get divorced, how many months of continuation coverage are Whitney entitled to?


14. Assume that Nicholas is driving his car on a foggy night and the car collides with a deer in the road. As a result, Nicholas incurs medical expenses of $1,000, and his friend, Bill, who is riding with him, incurs medical expenses of $2,000. The front bumper of the car also sustains damage of $1,500. If Nicholas files a claim for these items under his personal auto policy (PAP), what amount will the policy pay?


15. Nicholas’s son, Grant, is playing with a friend in the Clements’ back yard. Both of them attempt a daring back flip off a picnic table and land on the ground injuring themselves. Each child sustains medical bills of $900 for emergency room x-rays. What coverage is provided under the homeowner’s policy for this incident?


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