Suppose you are 46 and have a $310,000 face amount, 14-year, limited-payment, pa
ID: 2790905 • Letter: S
Question
Suppose you are 46 and have a $310,000 face amount, 14-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $1,085. The cash value of the policy is expected to be $12,400 in 14 years. Using time value of money and assuming you could invest your money elsewhere at an annual yield of 8 percent, calculate the net cost of insurance.
Suppose you are 46 and have a $310,000 face amount, 14-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $1,085. The cash value of the policy is expected to be $12,400 in 14 years. Using time value of money and assuming you could invest your money elsewhere at an annual yield of 8 percent, calculate the net cost of insurance.
Explanation / Answer
PV of annual premiums at 8% opportunity cost 1085*(1-1.08^-14)/0.08= 8945 PV of cash value in 14 yrs. At 8% 12400/(1.08)^14 4222 So, net cost of insurance for the policy-holder 8945-4222= 4723