question archive Mark has an after-tax income of $60,000 and is married to Helen
Mark has an after-tax income of $60,000 and is married to Helen
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Mark has an after-tax income of $60,000 and is married to Helen. While reviewing the couple's insurance needs, it is determined that in the event of Mark's death, Helen will have a net annual income of $38,000 and net annual expenses of $50,000 for her and her children to maintain the same lifestyle. Using the capital needs approach and assuming an after-tax inflation adjusted rate of 2.0%, how much life insurance would Mark need if the capital needs approach with the capital retention method is applied, so that his family may maintain their current lifestyle?
A) $2,500,000
B) $1,100,000
C) $600,000
D) $500,000
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In case after Mark's death,
Net Income = $38000
Net Expenses = $50,000
Therefore, Income needed = 50,000 - 38000 = $12,000
According to capital retention approach,
Lump sum insurance required = Income needed / Inflation adjusted Interest rate
= 12000/0.02
= $600,000
Hence, Option C is correct.
