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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.
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