1. Adjust salary downward

Generally, family living expenses fall by 30% with the loss of an adult. The larger the size of the surviving family, the less living expenses drop. Family size after death and percentage drop: 1 (30% drop), 2 (26%), 3 (22%), and 4 (20%).

Since Bill’s family would go from 4 to 3, his target replacement is $80,000 * (1-.22) or

$62,400

2. Choose the appropriate interest rate

Estimated after-tax and after-inflation rate is given at 5 percent.

3. Determine the income stream replacement

Number of years to replace income           N = 20 years

Estimated after tax and inflation rate         I = 5%

Target $80,000 * (1-.22) or                  PMT = $62,400

Solve for the Present Value. Since Bill wants the payments at the beginning of each year, put your calculator in 'begin' mode.

Bill needs $816,524

4. Subtract out current insurance available of $50,000:

816,524-50,000 = $766,524

The multiple of salary is:

766,524/80,000 = 9.6x

Bill should have 9.6 times his salary, or $766,524.