Suppose you are 35 and have a $45,000 face amount, 15-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $405. The cash value of the policy is expected to be $1,800 in 15 years. Using time value of money and assuming you could invest your money elsewhere for a 8 percent annual yield, calculate the net cost of insurance.

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Business

Marisa Liu

27 September, 05:58

Suppose you are 35 and have a $45,000 face amount, 15-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $405. The cash value of the policy is expected to be $1,800 in 15 years. Using time value of money and assuming you could invest your money elsewhere for a 8 percent annual yield, calculate the net cost of insurance.

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Skylar Miller · Answer 1

Net cost of insurance = $9,197

Explanation:

given data

face amount = $45,000

time = 15 years

annual premium = $405

cash value = $1800

annual yield = 8%

to find out

net cost of insurance

solution

we get here first Annual premium for 15 yrs is here

Annual premium = $405 * 15 years

Annual premium = $6,075

and

we use here Exhibit 1-B for 15 years and 8% that is come = 27.152

and Total cost of policy = $405 * 27.152 = $10,997

so

Time value of money is here

time value of money is = $10,997 - 6075 = $4,922

so

Net cost of insurance will be

Net cost of insurance = Total cost of policy - Cash value

Net cost of insurance = $10,997 - $1,800

Net cost of insurance = $9,197