Deborah is a 25-year-old female with limited financial resources and a four-year-old son. Ideally, she would like to purchase permanent insurance coverage, but her primary concern is making sure her son will be taken care of financially if she dies before he graduates from college. Given her current financial situation, she is interested in a term life insurance policy that will last 20 years. Deborah goes to an insurance broker to purchase a policy and is shown the following two rate tables to help her choose between annual renewable and level premium term life insurance. Yearly Rates on Term Life Insurance Policies Annual Renewable Term Life Rates Policy Year Age 25 Age 40 Age 60 1 $119 $139 $252 5 $147 $219 $562 15 $176 $507 $1,313 20 $259 $1,054 $2,989 Total Cost 5 Years: $625 $897 $2,100 Total Cost 15 Years: $2,135 $6,205 $11,987 Total Cost 20 Years: $3,777 $8,287 $22,346 Level Premium Term Life Rates Age 5 Year 15 Year 20 Year 25 $102 $84 $95 35 $101 $84 $95 40 $119 $102 $113 50 $136 $167 $195 60 $245 $295 $394 Given her age and desired policy term, she can purchase an annual renewable term life policy and pay in the first year and a total of over the course of the policy. Alternatively, she can purchase a level premium term life policy and pay a premium of per year for a total of over the course of the policy. This example is representative of why, in general, people today purchase term life insurance.

Pfin (with Mindtap, 1 Term Printed Access Card) (mindtap Course List)

7th Edition

ISBN:9780357033609

Author:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Publisher:Randall Billingsley, Lawrence J. Gitman, Michael D. Joehnk

Chapter8: Insuring Your Life

Section: Chapter Questions

Problem 5FPE

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5. Understanding term life insurance

Deborah is a 25-year-old female with limited financial resources and a four-year-old son. Ideally, she would like to purchase permanent insurance coverage, but her primary concern is making sure her son will be taken care of financially if she dies before he graduates from college. Given her current financial situation, she is interested in a term life insurance policy that will last 20 years.

Deborah goes to an insurance broker to purchase a policy and is shown the following two rate tables to help her choose between annual renewable and level premium term life insurance.

Yearly Rates on Term Life Insurance Policies

	Annual Renewable Term Life Rates
Policy Year	Age 25	Age 40	Age 60
1	$119	$139	$252
5	$147	$219	$562
15	$176	$507	$1,313
20	$259	$1,054	$2,989
Total Cost 5 Years:	$625	$897	$2,100
Total Cost 15 Years:	$2,135	$6,205	$11,987
Total Cost 20 Years:	$3,777	$8,287	$22,346

	Level Premium Term Life Rates
Age	5 Year	15 Year	20 Year
25	$102	$84	$95
35	$101	$84	$95
40	$119	$102	$113
50	$136	$167	$195
60	$245	$295	$394

Given her age and desired policy term, she can purchase an annual renewable term life policy and pay

in the first year and a total of

over the course of the policy. Alternatively, she can purchase a level premium term life policy and pay a premium of

per year for a total of

over the course of the policy.

This example is representative of why, in general, people today purchase term life insurance.

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