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COR167e Managing Your Personal Finances
Tutor Marked Assignment 02
July 2014
Copyright © 2014 SIM University
This tutor-marked assignment is worth 40% of the final mark for COR167e Managing Your Personal Finances.
The cut-off date for this assignment is 2359hrs on 10 October 2014.
1. Submit your solution document in the form of a single MS Word file on or before the cut-off date shown above.
2. You will need to indicate clearly on the front page your name, student ID, course title and assignment number.
3. The websites will help facilitate your research. However, you will be penalized if you simply cut & paste information from these websites in your assignment
This TMA assesses the student’s ability to:
• Describe the concept of time value of money.
• Translate key elements in their investment portfolio and retirement plan.
• Indicate the differences between various investment instruments and insurance plans and decide on what is most suitable.
The information provided in this case study will be used at various parts of this TMA.
George (Aged 43) and Grace Tham (Aged 40)
George and Grace have been married for the last 16 years. They have 3 children: Peter (16), Jean (12) and Simon (9, special needs)
George’s parents are in their late 60s. George is the oldest child in his family, and has two other sisters after him.
Grace is the second child. She is preceded by an older sister, and two younger brothers. Her mother is aged 75.
In the late 60s, George’s father started an import/export business dealing in mushrooms. Since a very young age, George has been helping his father out in the business, and is expected to take over the business in 2016.
Grace works as a graphic artist with a local production house.
The following represents the inflow and outflow figures for George and Grace family the period 1.1.2013 to 31.12.2013 :-
George Grace
Savings 6,000 $6,000.00
Fixed Outflows
CPF for house mortgage* $??,???.??
Cash for house mortgage* $??,???.??
Car loan repayment $0 $0
Insurance premium $6,265.00 $7,305
Variable Outflows
The following information pertains to assets and liabilities for the family as at 31.12.2013 :-
1. George’s and Grace’s CPF balances are as follows:
Financial Crisis, having been advised to invest in structured deposits. As a result of this, George’s excess funds are stashed in the following instruments: $70,000 in a savings account, and $200,000 in a one-year fixed deposit. Current interest rates applicable to both accounts are 0.35% and 1.18% respectively.
3. Grace, on the other hand, has made relative good returns from her unit trust investments, and holds about $67,000 in global equity funds. About 30% of these funds are in dividend paying unit trust that re-invests her dividends. Average dividend rate is 4% per annum.
She also holds 2 lots of land with a Land Banking outfit, where each lot costs USD10,000 (exchange rate at 31 December 2013 being USD/SGD 1.25). At the time of writing, there are no offers for the land that she holds.
4. The house that the Thams now live in was purchased 5 years ago, and is held in George’s sole name. The purchase price was $1,200,000, and the couple paid $400,000 in cash and CPF, and took up a loan for the balance. As at 31 December 2013,
• the house was valued at $1,500,000
• outstanding balance on the loan was $640,868
• The interest rate on the 22 year loan has remained unchanged at 1.5% per annum, monthly rest, resulting in a monthly instalment of $3,560. The Thams use all their monthly CPF Ordinary Account contribution to pay for the instalment, and tops up the balance with cash.
5. During a family holiday in December, $8,500 was charged to George’s credit card. He has yet to repay the credit card company.
6. The family car, a Mitsubishi Grandis bought in Grace’s name, was purchased 6 years ago and is fully paid for. The car has a street value of $56,000.
1. Peter has been giving tuition to group of 6 Primary School students at a rate of $15 per student per hour. His classes are 2 hours per session, and he conducts sessions separately for English, Maths and Science (a total of three sessions per week). He teaches from January to mid-November (excluding June), giving a grand total of 42 weeks of classes.
2. Grace recently detected lumps on her breast. She has made an appointment with an Oncologist.
3. Every month, George gives a monthly allowance of $1,000 to his parents for their expenses.
4. Family Survival Needs
George feels that he is responsible for financially providing for his family until their youngest child is 26 years old.
• When the house was first purchased, George bought a mortgage reducing term insurance on a joint-life basis to cover for 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). Premium for the mortgage protection plan is $3,515p.a.
• Having discovered that his wife has breast lumps, George decides to quickly buy a $600,000 Term plan with $500,000 Critical Illness benefit to cover Grace in the event she contracts and/or dies from cancer. Her term plan that covers her until age 99 costs her $7,305 each year. For fear of being uninsurable, she does not reveal in the medical questionnaire in the insurance application forms that she discovered breast lumps and is awaiting a medical examination. Her policy was approved by the insurer.
COR167e Managing Your Personal Finances Tutor-Marked Assignment 02
• About 8 years ago, Grace bought a $70,000 5-year limited-pay whole life plan. The plan covers her for accelerated Critical Illness benefit of $50,000. The annual premium for her plan was $7,500p.a. .The Cash Value of her plan is $42,979.
• George bought a $100,000 whole-life plan with $50,000 accelerated Critical Illness benefits when he was 30 years of age. His premium per annum is $2,750 payable for the duration of his policy, which expires at age 99. Cash value was estimated at 15,337.
5. Education Needs
George would like to provide for Peter and Jean to complete a basic 3-year degree at a local university at ages 21 and 19 respectively. He expects that a year’s tuition would cost about S$9,000 today, and that this amount would inflate by 6% per annum.
6. George has also been reflecting on probate and final expenses. Having done some research, George would like to provide for the following final expenses :-
Funeral Expenses $20,000
Probate Costs $32,198
• Due to the lifestyle enjoyed by the family, George has also been advised to keep aside for Emergency expenses an amount equal to 6 times his current monthly gross income. This will allow his family to have some immediate money to live on in the event of his demise, and until such a time his estate is disposed.
• George would also like to provide an additional $400,000 for Simon’s care.
Question 1 (20 marks)
Prepare for George and Grace (combined) the following:
(a) Cash Flow Statement for the period 1 Jan 2013 to 31 December 2013.
(10 marks)
(b) Net Worth Statement as at 31 December 2013.
(10 marks)
Question 2 (Total 42 marks)
(a) Using the information given in the case study above, determine George’s insurance requirement as at 31st December 2013 using the CPF Insurance Estimator found at mator/ie1.asp
Assume in your study that under Dependant’s Needs:
COR167e Managing Your Personal Finances Tutor-Marked Assignment 02
i. Household expenses (including all Parental Support) will be reduced by 30% in the event of George’s death. Round up the result to the nearest whole number.
This amount is to be provided until Jean is 25 years old.
ii. Expected returns and Inflation are 2% and 3.5% respectively
In your answer, insert a detailed printout of your results – all the headings and their items must be shown (a sample is shown below)
(24 marks)
(b) Insurance is an important risk management tool for personal financial planning, and insurers need to be able to make a proper and unbiased evaluation of the risk they underwrite. To do this, insurers depend on the principle of Uberrimae Fidei. Please read the two references given below:
1. Your Guide to Life Insurance found with The Life Insurance
Association (LIA) at TLI_Eng%28Oct07%29.pdf,
2. Section 25 (5) of the Life Insurance Act (Chap 142)
“No Singapore insurer shall use, in the course of carrying on insurance business in Singapore, a form of proposal which does not have prominently displayed therein a warning that if a proposer does not fully and faithfully give the facts as he knows them or ought to know them, he may receive nothing from the policy.”
i. Describe the Needs-Based Sales Advisory Process.
(6 marks)
ii. Indicate which policies will pay out, and how much will be paid, if Grace were to
a) Contract a Major Illness, (6 marks)
b) (1 year later) pass away (6marks)
COR167e Managing Your Personal Finances Tutor-Marked Assignment 02
Question 3 (Total 19 marks)
(a) While George has read a lot about the tax incentives of making SRS contributions, he is concerned that he would not have the freedom to use his funds in the SRS account in whichever way he wants.
i. Advise George about the situations that the SRS can be withdrawn without penalty, commenting also on how much tax must be paid on the amount withdrawn.
(5 marks)
ii. What Life Insurance products can George purchase using his SRS funds? Are there any restrictions for these products?
(5 marks)
(b) What is the Criteria for, and total amount of Qualifying Child Relief Grace can claim for the Year of Assessment 2014? (Show working to justify your answer)
(6 marks)
(c) When you look at the combined Cash Flow Statement of George and Grace, and assuming that the couple have both been at their jobs for at least the recent 5 years, offer the most likely explanation why they are both not paying any tax for YOA 2013.
(3 marks)
Question 4 (Total 19 marks)
(a) Discuss with George how he will be able to give each of his assets to his family in the event he passes on.
(10 marks)
(b) In the event that George passes on without making any formal arrangement (as discussed in (a) above) to pass on his estate, describe how his estate will then be distributed. Explain with relevant references.
(9 marks)
----- END OF COR167e TMA02 -----
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