Question

Natasha is 38 years old and married with two children. She earns $60,000 a year gross, and nets $46,000 after taxes. She anticipates working for 25 more years, and wants to assume a 5% rate of return. What is her life insurance need if she wants to use the income multiplier approach, and as her financial planner you use a multiplier of 15?

Answer 1

Given:

Gross Salary = $60000

Net Salary = $46500

Now if Natasha keeps on earning for 25 more years she would earn = $46000*25

= $11,50,000

Lets calculate insurance cover for her using income multiplier method:

Insurance cover = Gross salary * Income multiplier

= $60000*15

= $ 900,000 (Which is lesser than what she earns over the period of 25 years)

Conclusion: It is not suggested to take income multiplier as 15.

So what should be the income multiplier?

Lets calculate it.

Insurance cover should suffice to cover what she earns over the given period (25 years)

Let's try with 19 instead of 15

Cover = $60000*19 = $11,40,000 (Which is still lesser than $11,50,000)

So take multiplier as 20:

Cover now will be = $60000*20 = $12,00,000 which is more than what she would be earning.

Hence Multiplier should be >=20