Question

Neil has an after tax income of $60,000 as an accountant, paying 27% in taxes. Neil is concerned about how his young family will replace his income if he dies. After speaking to his life insurance agent and assuming a 3% rate of return, how much life insurance would his agent suggest that he obtain to replace his after tax income?

Answer 1

Neil's life insurance agent would suggest that he obtain a life insurance policy with a death benefit of $2,000,000 to replace his after-tax income.

Step-by-step explanation:

To calculate the amount of life insurance Neil should obtain to replace his after-tax income, we need to first determine his annual after-tax income. Neil's after-tax income is $60,000. Next, we need to calculate how much life insurance would generate $60,000 annually, assuming a 3% rate of return. To do this, we divide $60,000 by 3%, which is equivalent to multiplying $60,000 by 33.33:

Life Insurance Amount = $60,000 / 0.03 = $2,000,000

Therefore, Neil's life insurance agent would suggest that he obtain a life insurance policy with a death benefit of $2,000,000 to replace his after-tax income.