Eva is 29 years old and has 2 children, ages 3 and 5. She makes $48,500 a year. Eva decides to buy a $400,000 10-year term policy and then renew the policy for another ten years afterward. To renew the policy, the insurance company charges an extra 40% to her premium rate. Given the options below, assess whether Eva made a wise decision.
| Age | Annual Life Insurance Premium (per $1000 of face value) |
|---|---|---|---|---|---|
| | 10-Year Term | 20-Year Term | Whole Life |
| | Male | Female | Male | Female | Male | Female |
| 29 | $7.54 | $5.62 | $10.40 | $9.04 | $20.05 | $18.63 |
a. Eva would have been better off selecting the 20-year term policy.
b. Even with the extra charge for renewal, Eva's plan is the least expensive.
c. Given that Eva plans to renew, she should have selected the whole life policy.
d. Eva ends up paying the same amount for each policy.
Please select the best answer from the choices provided.
Answer (2)
Calculate the total cost of Eva's plan (10-year term renewed) over 20 years: $53,952.
Calculate the total cost of the 20-year term policy over 20 years: $72,320.
Calculate the total cost of the whole life policy over 20 years: $149,040.
Eva's plan is the least expensive, so the answer is B .
Explanation
Problem Analysis We need to determine the best life insurance option for Eva, considering a 10-year term policy with renewal, a 20-year term policy, and a whole life policy. We will calculate the total cost of each option over 20 years and compare them.
Cost of Eva's Plan First, let's calculate the cost of Eva's current plan: a 10-year term policy renewed for another 10 years. The initial annual premium is calculated as follows: Initial Premium = 1000 Face Value × Premium Rate = 1000 400000 × 5.62 = 2248 The renewal premium includes a 40% increase: Renewal Premium = 1.40 × Initial Premium = 1.40 × 2248 = 3147.2 The total cost for Eva's plan over 20 years is: Total Cost = 10 × Initial Premium + 10 × Renewal Premium = 10 × 2248 + 10 × 3147.2 = 22480 + 31472 = 53952
Cost of 20-Year Term Policy Next, let's calculate the cost of a 20-year term policy. The annual premium is: 20-Year Premium = 1000 Face Value × Premium Rate = 1000 400000 × 9.04 = 3616 The total cost for the 20-year term policy over 20 years is: Total Cost = 20 × 20-Year Premium = 20 × 3616 = 72320
Cost of Whole Life Policy Now, let's calculate the cost of a whole life policy. The annual premium is: Whole Life Premium = 1000 Face Value × Premium Rate = 1000 400000 × 18.63 = 7452 The total cost for the whole life policy over 20 years is: Total Cost = 20 × Whole Life Premium = 20 × 7452 = 149040
Cost Comparison Comparing the total costs:
Eva's plan (10-year term with renewal): $53,952
20-year term policy: $72,320
Whole life policy: $149,040
Eva's plan is the least expensive option.
Conclusion Based on the cost comparison, Eva's plan (10-year term with renewal) is the least expensive. Therefore, even with the extra charge for renewal, Eva's plan is the least expensive.
Examples
Life insurance decisions are similar to planning for a secure future. For instance, when saving for retirement, you might choose different investment strategies (like stocks, bonds, or real estate) based on your risk tolerance and financial goals. Similarly, selecting a life insurance policy involves assessing your family's needs and comparing the costs and benefits of various options to ensure they are financially protected in the long term. Just as you would research investment options, understanding the terms and costs of different insurance policies is crucial for making an informed decision.
Eva's 10-year term insurance plan, even with a renewal cost increase, is the least expensive option compared to a 20-year term policy and a whole life policy. The total cost for her plan over 20 years is $53,952, while the alternatives are significantly more expensive. Thus, I choose option b.
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