CASE STUDY

Julian Lim, a Singaporean, is a Vice President at a large MNC. He has a 4-year-old daughter named May as well as a 2-year-old son named Matthew. Matthew was born with Down syndrfome. In addition, Julian Lim’s mother-in-law, who is 60 years old, stays with them to take care of the children with the help of a maid.

WEALTH PROTECTION – INSURANCE PLANNING

The house that the Lims now live in was purchased 5 years ago, and is held in joint names. The purchase price was $1,200,000, and the couple paid $400,000 with cash and CPF, and took up a loan for the balance. When the house was first purchased, Julian Lim bought a mortgage- reducing term insurance on a joint-life basis to cover the initial loan value of $800,000 at a discount rate of 1.5% p.a. (a feature of the policy is that it pays the outstanding balance of the loan at the death of the insured). The premium for the mortgage protection plan is $3,515p.a.

The doctors have discovered that his wife, Poh Eng, has some lumps in her breasts. Julian Lim quickly decides to buy a $600,000 Term plan with $500,000 Critical Illness benefit to cover Poh Eng in the event that she contracts and/or dies from cancer. Her term plan covers her until age 99 and costs her $7,305 each year. For fear of being uninsurable, Julian Lim did not reveal in the medical questionnaire in the insurance application forms that Poh Eng had discovered some lumps in her breasts and was awaiting a medical examination. The policy was approved by the insurer.

About 8 years ago, Poh Eng bought a $70,000 5-year limited-premium whole life plan. The plan covers her for accelerated Critical Illness with a benefit of $50,000. The annual premium for her plan was $7,500p.a. The Cash Value of her plan is $42,979.

WEALTH ACCUMULATION – INVESTMENT PLANNING

Julian Lim purchased a put option at the cost of $0.30 each. The put option has a strike price of S$3.00 and the underlying stock is currently trading at S$3.50. Julian Lim bought 100 shares.

WEALTH GIVING – ESTATE PLANNING

Poh Eng’s Summary of Insurance Policies

Both Julian Lim and Poh Eng do not have a Will and have not affected any recent CPF nomination.
Poh Eng is very concerned about her own Estate Planning as she is worried that if anything happens to her or Julian Lim, there will be no one to take care of her family. She is aware that she has an elderly mother who depends on her financially as well as her 2 young children, especially Matthew who is a child with special needs.

Question 1: WEALTH PROTECTION – INSURANCE PLANNING (34 marks)

1(a) Choose the correct statements with regard to insurance. (8 marks)

1. Regarding the characteristics of insurance, which of the following is/are fundamentals?

I. Probability (possibility and predictability of a loss)

II. Law of large numbers

III. Transfer of risk from individual to group

IV. Insurance is a form of speculation

A I and II only.

B I, II and IV only.

C I, II and III only.

D IV only.

2. Adherence to the principle of indemnity means that:

A The insurer will pay the face amount of a life insurance policy, regardless of the cause of death.

B The insured can profit from his or her insurance coverage if he or she has two identical fire insurance policies.

C The insurer will reimburse the insured only to the extent of the insured’s financial loss.

D The insurer does not have to rely on the insured’s representations contained in the application for insurance.

3. Julian Lim and Poh Eng own a house valued at approximately $450,000 and an automobile valued at $65,000. The most practical method for this family to handle these exposures would be:

A Avoidance of the exposures

B Hazard reduction and loss reduction

C Risk shifting or transfer

D Risk reduction

4. Which of the following statements concerning individual disability income policies is NOT correct?

A They usually contain a waiting or elimination period.

B They usually cover both accidents and sickness.

C They usually replace all of the disabled insured’s lost earnings.

D They have more than one definition of disability.

5. Julian Lim and Poh Eng are considering buying a long-term care policy on Poh Eng’s mother in case they need to place her in a long-term care facility. Which of the following steps can Julian Lim and Poh Eng take to hold down the annual premium cost of the coverage?

A Select a long waiting period or elimination period.

B Wait a few years before obtaining the coverage.

C Add an inflation protection rider.

D Choose a policy that has a lifetime benefit period.

6. Poh Eng’s cousin, Theresa Goh, aged 63, has inherited $250,000 from her mother and wants to use the money as a retirement fund. Since her family has long life expectancies, she is concerned about running out of money in her old age. What kind of annuity is most appropriate for Theresa?

A Straight life annuity

B Life annuity with refund features

C Life annuity with period certain

D Temporary annuity

7. You have just sold Julian Lim a whole life policy and pointed out to him that, in addition to providing death benefit protection, the policy builds up a cash value. Julian Lim asks you where the cash value comes from. Which statement reflects accurately what you will tell him?

A Insureds who discontinue their insurance contribute to a surplus fund

B The interest rate actually earned exceeds the assumed interest rate

C The net premium is greater than the mortality costs of the early years

D The mortality table used shows higher mortality than actual mortality

8 For which of the following needs is term life insurance best suited?

A Meeting the inheritance needs of a wealthy client

B Retiring an instalment debt obligation at death

C Providing a life income for the insured’s widow

D Accumulating funds for retirement

1(b)(i) What is meant by Uberimmae Fidei, especially in the context of insurance contracts (refer to Investopedia)? (3 marks)

1(b)(ii) Explain why Uberrimae Fidei is important to the underwriting and issuing of contracts of insurance. How can the insurer protect itself if an applicant does not disclose material facts when applying for an insurance policy? (3 marks)

1(c) What is the difference between waiver of premium and total permanent disability benefits? (6 marks)

1(d) Identify which policies will pay out, and indicate how much will be paid, if Poh Eng were to:

(i.) Contract a major illness? (7 marks)

(ii.) Pass away one year later? (7 marks)

Question 2: WEALTH ACCUMULATION – INVESTMENT PLANNING (32 marks)

2(a) Write “TRUE” or “FALSE” for the following statements with regards to investment.

______ The owner of a convertible bond has the option to become a shareholder.

______ The expected return of a portfolio return is a weighted average of the component expected return.

______ A large reverse split will reduce the number of shareholders.

______ A warrant gives its owner the right to sell shares back to the company at a pre-determined price.

______ A retail food chain is a cyclic stock.

______ A forward PE is sometimes less than a trailing PE.

______ If a firm’s asset turnover increases, its return on assets also increases, assuming everything else remains constant.

______ A stock that breaks through support level gives a bullish signal.

______ Increased margin buying has historically been associated with recently rising markets.

______ Small firms tend to outperform those with larger capitalization. (10 marks)

2(b)(i) Determine the stock price that would allow Julian Lim to break even on his put option strategy. (4 marks)

2(b)(ii) Calculate the maximum loss to be incurred by Julian Lim in this put option strategy. (4 marks)

2(b)(iii)Calculate the maximum gain to be produced for Julian Lim by this put option strategy. (4 marks)

(c) Construct a profit/loss table and draw a graph for Julian Lim to show him the relationship between the profit/loss on this put option strategy to the underlying share price. (10 marks)

Question 3: WEALTH GIVING – ESTATE PLANNING (34 marks)

3(a) For Poh Eng’s 5-year limited premium whole life plan, she needs her husband’s and children’s written approvals before she can revoke her insurance nomination of beneficiaries. State the validity of this statement. (4 marks)

3(b) Poh Eng came to know that the CPF Board has established the Special Needs Savings Scheme (SNSS) for parents of children with special needs. You are required to describe the following:

(i) What is the purpose of the Special Needs Savings Scheme? (2 marks)

(ii) How can parents increase their accumulation for their child under the SNSS? (4 marks)

3(c) Upon her Death, Poh Eng wishes to give her assets shown below to the stated beneficiaries. You are to advise her the most effective way of planning her estates:

(i) CPF Account Balance to her sister. (4 marks)

(ii) Savings and Shares to charity. (4 marks)

(iii) Insurance Policies’ Proceeds to Julian Lim and Matthew. (4 marks)

3(d) From the case study, briefly explain what possible actions Poh Eng can take to address the estate planning needs of her mother and children? (12 marks)