8. An insurance salesman offers you a Cash Value life insurance policy for $250,

Question

8. An insurance salesman offers you a Cash Value life insurance policy for $250,000 (payable on your death or at age 95, whichever happens first) for monthly premiums of $150. He indicates that cash value insurance is a great investment. From reading the textbook you know cash value life insurance assumes a 4% annual return. If you die at 95 is it a good investment, assuming you are offered the policy when you are 25?

a) What is the future value of the premiums when you turn 95?

b) At what annual interest rate would I earn $250,000 investing $150 a month for 70 years?

c) I purchased a cash value policy with a $250,000 death benefit on my 25th birthday. Based on a 4% annual return and $150 monthly premium, I would need to die before I reach the age of X to make it a good investment.

Explanation / Answer

Yearly payment 1800 Years Amount 1 1872 a) Monthly $150 2 3818.88 Formula: Yearly 1800 3 5843.6352 J172+$J$168*(1.04)^I173 4 7949.380608 Future value of premiums                         681,951.74 5 10139.35583 6 12416.93007 7 14785.60727 b) Actual value $250,000 8 17249.03156 Rate of interest needed R% 9 19810.99282 10 22475.43253 250000 = 1800*(1+r/100)^70 11 25246.44984 12 28128.30783 R 7.302% To meet break even, we require 7% to gain $250000 13 31125.44014 14 34242.45775 c) From Excel calcualtions shown beside , we have to die on or before age of 47 to make this a good investment 15 37484.15606 16 40855.5223 17 44361.74319 18 48008.21292 19 51800.54144 20 55744.56309 21 59846.34562 22 64112.19944 23 68548.68742 24 73162.63492 25 77961.14031 26 82951.58593 27 88141.64936 28 93539.31534 29 99152.88795 30 104991.0035 31 111062.6436 32 117377.1494 33 123944.2353 34 130774.0047 35 137876.9649 36 145264.0435 37 152946.6053 38 160936.4695 39 169245.9283 40 177887.7654 41 186875.276 42 196222.287 43 205943.1785 44 216052.9057 45 226567.0219 46 237501.7028 47 248873.7709 48 260700.7217 49 273000.7506 50 285792.7806 51 299096.4918 52 312932.3515 53 327321.6456 54 342286.5114 55 357849.9718 56 374035.9707 57 390869.4095 58 408376.1859 59 426583.2334 60 445518.5627 61 465211.3052 62 485691.7574 63 506991.4277 64 529143.0848 65 552180.8082 66 576140.0405 67 601057.6422 68 626971.9478 69 653922.8258 70     681,951.74

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.