Joshua is 25 years old and has a high risk job making $72,000 a year. The insurance company charges him an extra 20% on top of his premium rate because of his job. If Joshua wants a policy that will replace five years of his salary, what is the annual premium for the cheapest policy?
| Age | Annual Life Insurance Premium (per $1000 of face value) |
|---|---|---|---|---|---|
| | Whole Life | 20-Payment Life | 20-Year Endowment |
| | Male | Female | Male | Female | Male | Female |
| 25 | $15.38 | $13.38 | $26.40 | $22.04 | $34.02 | $30.87 |
| 26 | 15.91 | 13.77 | 27.11 | 22.96 | 34.67 | 31.30 |
| 27 | 16.27 | 14.23 | 27.97 | 23.83 | 35.23 | 31.96 |
| 28 | 16.76 | 14.66 | 28.68 | 24.54 | 35.96 | 32.44 |
| 29 | 17.25 | 15.09 | 29.39 | 25.25 | 36.69 | 32.92 |
| 30 | 17.75 | 15.52 | 30.11 | 26.97 | 37.43 | 33.40 |
A. $1,107
B. $1,328
C. $5,537
D. $6,644
Answer (2)
Calculate the total insurance needed: 5 × $72 , 000 = $360 , 000 .
Determine the base premium for Whole Life insurance: 360 × $15.38 = $5536.80 .
Calculate the total premium for Whole Life insurance with the extra 20% charge: 1.2 × $5536.80 = $6644.16 .
The annual premium for the cheapest policy is $6 , 644 .
Explanation
Calculate total insurance needed First, we need to calculate the total insurance Joshua needs. Since he wants to replace five years of his salary, and his annual salary is $72,000, the total insurance needed is:
Total insurance amount 5 × $72 , 000 = $360 , 000
Identify premium rates Next, we need to find the cost per $1000 of face value for each type of policy for a 25-year-old male. From the table:
Whole Life: $15.38 per $1000
20-Payment Life: $26.40 per $1000
20-Year Endowment: $34.02 per $1000
Calculate base premiums Now, we calculate the base premium for each policy type. Since Joshua needs $360,000 of insurance, we need to determine how many '$1000' units that is:
Number of units $1000 $360 , 000 = 360
Base premium calculations So, we multiply the cost per $1000 by 360 for each policy type: * Whole Life Base Premium: $360 \times $15.38 = $5536.80
20-Payment Life Base Premium: $360 \times $26.40 = $9504 * 20-Year Endowment Base Premium: $360 \times $34.02 = $12247.20
Calculate extra charges Since Joshua has a high-risk job, the insurance company charges an extra 20% on top of the premium rate. We need to calculate this extra charge for each policy type.
Calculate total premiums To calculate the total premium, we add the base premium and the extra charge. This is equivalent to multiplying the base premium by 1.2 (since the extra charge is 20% of the base premium).
Total premium calculations
Whole Life Total Premium: $1.2 \times $5536.80 = $6644.16
20-Payment Life Total Premium: $1.2 \times $9504 = $11404.80
20-Year Endowment Total Premium: $1.2 \times $12247.20 = $14696.64
Determine the cheapest policy Comparing the total premiums for each policy type, the cheapest policy is the Whole Life policy with an annual premium of $6644.16.
Final Answer Therefore, the annual premium for the cheapest policy is $6 , 644.16 .
Examples
Life insurance premiums are calculated based on factors like age, health, and occupation. High-risk jobs, like construction or firefighting, often incur higher premiums due to the increased likelihood of accidents or health issues. Understanding these factors helps individuals make informed decisions about their insurance needs and financial planning, ensuring they have adequate coverage while managing costs effectively. For instance, knowing how a high-risk job affects premiums allows someone to budget accordingly and explore options to mitigate these costs, such as improving health or seeking safer work environments.
Joshua needs a life insurance policy to replace five years of his $72,000 salary, totaling $360,000. The cheapest policy, Whole Life, has an annual premium of $6,644 after factoring in a 20% increase for his high-risk job. The final answer is option D: $6,644.
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