After reviewing the earnings multiple approach and the needs approach, Cory and Tisha opt for the simpler earnings multiple approach to estimate their life insurance needs. As Cory explains, “There are just too many unknowns in that needs approach formula. Years of income to be replaced I can understand. If T die tomorrow, I want to know that Tisha can buy a home and the kids can finish college. Chad is 4 and Haley is 2. With 20 years of my income, they should be able to do that.” Tisha agrees, although she cautions that before purchasing insurance she would like to confirm their estimates by completing the needs formula. They agree that they could earn a 5 percent after-tax, after-inflation return on the insurance benefit. Do Tisha and Cory have adequate life insurance? If not, how much should each consider purchasing? (Hint: Remember that expenses drop by 22 percent for a surviving family of three. Be sure to consult Table 9.2, “Earnings Multiples for Life Insurance.”)
