. An insurance salesman offers you a Cash Value life insurance policy for $250,0

Question

. 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?

Hint* Insurance Face Value = FV, Interest = 4 annual or 4/12 monthly, premiums=payments, n= number of years (annual) or monthly periods (years x 12).

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

FV at 95=150*(1+4%/12)^840..................150*(1+4%/12)=150*((1+4%/12)^840-1)/(4%/12)=691571.39

So, for FV to be 250000, r=1.779%

Future value of premiums till the age of X=150*((1+4%/12)^(12*(x-25))-1)/(4%/12)

This should be less than or equal to 250000

150*((1+4%/12)^(12*(x-25))-1)/(4%/12)<=250000

Hence, x<=72

You would need to die before reaching the age of 72

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