Case Facts

Because their cars were getting old, Amy and John Schultz decided to trade in Amy’s Saturn and buy a new car before going on a 2-week cross-country vacation. As soon as they got home from the dealership, they called their insurance agent, provided the necessary information on the new car, and discussed their coverage options. The agent said they would receive a bill for the additional premium involved in insuring their new car and assured them coverage on the new car was now bound, and they were protected immediately.

Amy and John also asked their insurance agent if they could obtain some life insurance coverage before they left on their trip next week. The agent informed them that they should come down to her office, complete an application, and pay the premium, but that she could not assure them that the policy would be in force in time for their vacation trip. On the way to the agent’s office, John instructed Amy not to tell the agent that Amy had recently been treated for depression.

As you recall, Amy Schultz, who is 28, and her husband John, who is 33, are both engineers employed by SKH, Inc. John has an annual salary of $95,000. Amy currently earns $55,000 a year. The Schultzes have $60,000 in a money market account. They have just purchased their first house for $240,000 with 20 percent down and a 15-year mortgage at an interest rate of 5 percent.

SKH provides group benefits that include life insurance of two times their salaries. Amy and John currently own no individual life insurance policies, but have now decided to buy life insurance for three reasons: First, as first-time homeowners, they are concerned about Amy’s ability to make mortgage payments, based only on her income, if John should die. Second, they plan to have children soon and ultimately to put the children through college. Finally, if possible, they would like to provide an inheritance for their children. They are concerned, however, about the potential effects of future inflation.

Case Analysis

1- If Amy and John complete life insurance applications today, pay the premiums, and have their applications approved, when will their policies become effective?

2- In completing a life insurance application, Amy provides an incorrect answer to the question about whether she had ever been treated for depression. How, if at all, will this affect Amy’s life insurance coverage?

3- Do Amy and John have temporary life insurance needs or permanent life insurance needs? Explain.

4- What type of life insurance does Amy and John’s employer probably provide?

5- What type of life insurance would enable Amy to pay off the mortgage if John should die?

6- What type(s) of life insurance would enable Amy and John to ensure that funds are available for their children’s education even if one or both parents dies?