Peg Gasperoni bought a $50,000 life insurance policy for $270 per year. Ryan Lif

Question

Peg Gasperoni bought a $50,000 life insurance policy for $270 per year. Ryan Life Insurance Company sent her the following billing instructions along with a premium plan example: "Your insurance premium notice will be mailed to you in a few days. You may pay the entire premium in full without a finance charge or you may pay the premium in installments after a down payment and the balance in monthly installments of $70. The finance charge will be added to the unpaid balance. The finance charge is based on an annual percentage rate of 15%." If the total policy premium is: And you put down: The balance subject to finance charge will be: The total number of monthly installments ($30 minimum) will be: The monthly installment before adding the finance charge will be: The total finance charge for all installments will be: And the total deferred payment price will be: $270 $70.00 $200.00 3 $70.00 $5.18 $275.18 $370 $90.00 $280.00 4 $70.00 $8.94 $378.94 $470 $115.00 $355.00 6 $70.00 $14.22 $484.22 Peg feels that the finance charge of $5.18 is in error. Check your answer. a. What is the actual finance charge for the first three months? (Round your answer to the nearest cent.) Finance Charge $

Explanation / Answer

Finance Charge for first month       = (270 - 70) x 15% / 12 = $2.50
Finance Charge for second month = (200 - 70) x 15% / 12 = $1.63
Finance Charge for third month      = (130 - 70) x 15% / 12 = $0.75

So, total finance charge for first 3 months = 2.5 + 1.63 + 0.75 = $4.88

The finance charge of $5.18 calculated by Ryan Life Insurance Company is incorrect.

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