Liam O'Kelly is 20 years old and is thinking about buying a term life insurance policy with his wife as the beneficiary. The quoted annual premium for Liam is $8.48 per thousand dollars of insurance coverage. Because Liam wants a $100,000 policy (which is 2.5 times his annual salary) the annual premium would be $848, with the first payment due immediately (i.e., at age 21).
A friend of Liam's suggests that the $848 annual premium should be deposited in a good mutual fund rather than in the insurance policy. "If the mutual fund earns 10% per year, you can become a millionaire by the time you retire at age 65," the friend advises. (4.7)
a. Is the friend's statement really true?
b. Discuss the trade-off that Liam is making if he decides to invest his money in a mutual fund.