LLQP practice question 29 of 35

Julie and her spouse, Vincent, have two children, the youngest of whom is 5. Their salaries are roughly equivalent, at around $65,000 each. If Julie…

Julie and her spouse, Vincent, have two children, the youngest of whom is 5. Their salaries are roughly equivalent, at around $65,000 each. If Julie loses her spouse, she would receive, each month, $700 from the government plan and an orphan’s pension of $230 for each of her two children. She would also receive a monthly pension of $790 from her spouse's pension plan. The monthly expenses after her spouse's death are estimated at $4,000. Julie's disposable income will be about $1,500 a month. She is worried about the impact on her children's standard of living, especially over the next 10 years. What is the annual shortfall if Vincent dies?

Answer options

A: $550.

B: $6,600. Correct answer

C: $13,200.

D: $39,600.

Correct Answer:

B. $6,600.

Explanation

The annual shortfall is calculated by first determining the total monthly income and subtracting it from the total monthly expenses, then annualizing the result.
1. Calculate Total Monthly Income: Sum all sources of income for the surviving family. Julie's disposable income: $1,500 Government plan survivor benefit: $700 Orphan's pension (2 children × $230): $460 Spouse's pension plan benefit: $790 Total Monthly Income = $3,450
2. Calculate Monthly Shortfall: Subtract total income from monthly expenses. Monthly Shortfall = $4,000 (Expenses) - $3,450 (Income) = $550
3. Calculate Annual Shortfall: Multiply the monthly shortfall by 12. Annual Shortfall = $550 × 12 = $6,600

Why Incorrect

A. $550: This represents the correct monthly shortfall, but the question specifically asks for the annual shortfall.
C. $13,200: This figure is double the correct annual shortfall and does not result from a logical calculation based on the data provided.
D. $39,600: This amount is incorrect. Reaching this figure would require ignoring most of the family's income sources, which contradicts the standard needs analysis methodology.

References

1. IFSE Institute, Life Insurance (LLQP) - Module 3: Needs Analysis. The methodology for determining an insurance need involves calculating the difference between the financial resources available to survivors and the expenses they will face. The calculation is explicitly defined as: Total Income Sources - Total Expenses = Surplus or Shortfall. The scenario in the question directly applies this principle.

2. Kapoor, J. R., Dlabay, L. R., Hughes, R. J., & Ahmad, A. (2020). Personal Finance (7th Canadian ed.). McGraw-Hill Ryerson. Chapter 11, "Life Insurance," outlines the "income replacement method" for estimating life insurance needs, which involves calculating the difference between the survivor's annual income and their annual expenses to identify the financial gap or shortfall. The calculation performed ($550/month or $6,600/year) is a direct application of this established financial planning method.

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