Once again, we emphasize the approximate nature of any
Your students should have the elements of
this suggested solution, but their assumptions will
Using the Income Approach:
i) Real rate of return is 3%
ii) Rule of thumb tax adjustment is 75%.
iii) Added child care expenses equal to reduction in
living expenses plus Canada Pension payable to
Maria and children on death of Walter.
reasonable assumptions by students can be
incorporated easily in the solution.
values are in real dollars.
iv) Work to age 65.
Insurance on Walter:
PV of added stuff at death:
lump sum CPP
Note that this is an income replacement approach.
other assets of the family are accumulated from past
PV required = PVA 31,000 (3%, 35 years) - 65,000
= 666,104 - 65,000 = 601,104.
Tax-adjusted = .75 X 601,104 = 450,828.
Insurance on Maria:
That child care expenses increase by $3,000 on
Walter will have a marginal tax rate of 30%
Income shortfall = 4,000 + 3,000 = 7,000.
Before tax income required = 10,000
PV required = PVA 10,000 (3%, 36 yrs) = 218,323
Tax-adjusted = .25 X 218,323 = 163,742
Using the Expense Approach