Problem
Salvador and Michelle are a young couple with three small children, Bart (age three), Jan (age two), and Billy (age four). Michelle is an marketing representative at an advertising firm while Salvador has taken a couple years off from his profession as an architect to work on an MBA degree. Right now Salavador and Michelle's budget is very tight, as they are accustomed to living on two incomes, but Michelle's employer has just circulated employer benefit information, so Salvador and Michelle believe this is a good time to evaluate their life insurance needs. They have listed the financial information they believe is relevant.
Current life insurance (Salvador) $ 85,000
Current life insurance (Michelle) $ 60,000
Assets available for living expenses 0
Present value of Social Security benefits if Salvador dies $125,400
Present value of Social Security benefits if Michelle dies $157,810
Salvador's income before he went back for the MBA $ 67,000
Michelle's income $ 60,000
Percent of income that needs to be replaced 75 percent
Projected final expenses $9,000
Projected readjustment-period needs $4,000
Projected debt-repayment needs $ 16,000
Projected college-expenses $ 95,000
Number of years income replacement is needed 20
Assumed rate of return on invested funds 5 percent
Appropriate interest rate factor 13.5
Using a 7-year multiple-of-earnings approach, how much additional life insurance is needed on Salvador's life?