Consider the following information based on,a story by H ubert B. Herning that a

Question

Consider the following information based on,a story by H ubert B. Herning that appeared in The New York Times on Api 17, 19917 Catherine has a two-pack-a-day cigarette habit. Cigarettes cost about $2 per pack. Catherine is 20. On a $250,000 life insurance policy, her annual premiums are $1200, a non-smoker's would be $500. Smokers earn from 4 to 8 percent less in income than non-smokers (lower productivity and more absence, among other things). In this case Catherine's income is expected to be $20,500 per year over her lifetime whereas $22,000 is an average non-smokers salary Let interest rates are expected to be 3%. Refer to Scenario 5. If Catherine stopped smoking, then what is the total amount that Catherine will save on life insurance premiums over the rest of her expected lifespan? O A. $56,000 O B. $700 O c. S30.000 O D. $14.000 O E. $42.000 Click to select your answer

Explanation / Answer

Answer E. $42,000

Let us understand how.

Given the information in Scenario 5, if Catherine's life expectancy is 80 as a non-smoker, then she has another 60 years to pay her insurance premuim. The insurance premium she will pay as a non-smoker will be $700 ($1200-$500) per year less than what she pays as a smoker.

Hence she saves $700 per year by being a non smoker on the inurance premuim.

Now the question here asks how much she will save as a non smoker on insurance premuims in her entire life. As Catherine is already 20 now, she has to pay Insurance premuims for another 60 years, hence she will save $42000 ($700*60) in her entire life on insurance premiums.

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