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Money Smarts
Chapter 14 Money Smarts: Insurance or Investment?
Your options for life insurance range from
term insurance, which is a “no frills”
type of insurance, to variable life insurance, which
allows you to invest part of your premiums in a stock fund,
a bond fund, or a money market fund. If investing your premiums
seems like an attractive option, keep in mind that you assume
the risk of poor investment performance.
Universal life insurance allows
you to invest part of your premiums in low-risk, low-yielding
investments. Like some other policies, universal life has
a cash value feature. Also known as cash surrender
value, this option allows you to cancel the policy and
receive the cash value as a lump sum. However, you will have
to pay a surrender charge to cancel the policy.
Go to the BusinessWeek Online
Personal
Finance Insurance calculators. Under Life Insurance Calculators,
click on “What is my return on a universal life policy?”
Input the following values:
| Policy amount |
$150,000 |
| Current age |
25 |
| Years you have owned the policy |
3 |
| Years until your death |
60 |
| Your state + federal tax rate |
25.80% |
Monthly
premiums |
Years
premium
paid |
Lump sum
premiums |
Year
lump sum
due |
| $ 75 |
20 |
$5,000 |
7 |
| $150 |
30 |
$0 |
0 |
| $225 |
10 |
$0 |
0 |
| Your policy’s
cash value |
|
| Current cash value |
$2,500 |
| Average interest you will earn |
4.00% |
| Years until you cash out |
10 |
| Surrender charge |
3.00% |
| Your fees |
|
| Upfront fees |
$150 |
| Portion of premiums applied to fees |
2.00% |
| Monthly fees |
$5 |
Or
Yearly insurance charge (percent of policy amount) |
0.00% |
Or
Yearly insurance fee (percent of cash value) |
0.00% |
Your death benefit
Receive policy amount only
Click on the “get your results”
button and answer the following questions.
- If you cash in your policy now, how much will you receive
after paying income taxes?
- Why is your answer to Question 1 different from the “current
cash value” amount that you input?
- What is the amount of taxes owed? Why is it this amount?
- What would be the after-tax rate of return based on the
death benefit paid to your beneficiary in 60 years?
- Is this a good investment? Why or why not?
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