Consider the following information of a Whole Life policy and a Term Life policy
ID: 2742839 • Letter: C
Question
Consider the following information of a Whole Life policy and a Term Life policy:
Guaranteed Contract Premium Guaranteed Death Benefit Projected
Dividend Projected Cash Value Term Premium
$2,300 $200,000 0 0 $325
$2,300 0 0 $330
$2,300 0 0 $335
$2,300 0 $3,500 $340
$2,300 $250 $6,000 $355
$2,300 $400 $9,000 $370
$2,300 $600 $13,000 $390
Which policy is better if cash can be invested at 9% return?
Term Life Policy since IRR of difference in cash flows is greater than 9%
Whole Life Policy since IRR of difference in cash flows is greater than 9%
Term Life Policy since IRR of difference in cash flows is less than 9%
Whole Life Policy since IRR of difference in cash flows is less than 9%
Explanation / Answer
Guaranteed Guaranteed Projected Projected Term Life Premium Minus Cash Flows Contract Death Benefit Dividend Cash Premium Term premium and Premium value Dividend 1 2 3 4 5 6 = 1-5 7 = 4+6 $ 2,300.00 $ 2,00,000.00 $ - $ - $ 325.00 $ 1,975.00 $ -1,975 $ 2,300.00 $ - $ - $ 330.00 $ 1,970.00 $ -1,970 $ 2,300.00 $ - $ - $ 335.00 $ 1,965.00 $ -1,965 $ 2,300.00 $ - $ 3,500.00 $ 340.00 $ 1,960.00 $ -5,460 $ 2,300.00 $ 250.00 $ 6,000.00 $ 355.00 $ 1,945.00 $ -7,945 $ 2,300.00 $ 400.00 $ 9,000.00 $ 370.00 $ 1,930.00 $ -10,930 $ 2,300.00 $ 600.00 $ 13,000.00 $ 390.00 $ 1,910.00 $ -14,910 Benefit >> $ 2,00,000 IRR >>> 5.5% Whole Life Policy can be selected if the difference between the term and whole policies is at 9%
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