QUESTION 3: Tony Soprano who is 35 year old would like to obtain $250,000 life insurance coverage from now until the age of 50. He is wondering whether he should get whole life policy or the term insurance policy. He can earn an after tax rate of return of 3%. His marginal tax rate is 46%. If he purchases term insurance then any difference between whole life and term insurance premium will be invested, which he will withdraw when he turns 50. Determine his after tax wealth if he purchases today

a. whole life policy and cancels it as soon as he turns 50.

b. term insurance policy and invest the difference outside RRSP.

c. term insurance policy and invest the difference + tax savings inside RRSP. What would you recommend? Use table 10.4. Multiply values in the table by 2.5 to obtain values for a $250,000 face value insurance policy.

TABLE 10.4 Comparing Term and Whole Life (Face Value of $100,000) Whole Life Term Age Net Premiums Cash Value Net Premiums 35 $1,316 $ 0 $163 36 1,165 0 166 37 1,127 500 169 38 1,085 1,500 176 39 1,043 2,600 185 40 994 3,740 196 41 945 4,880 214 42 896 6,020 231 43 847 7,160 249 44 798 8,300 265 45 736 9,500 288 46 672 10,700 310 47 609 11,900 336 48 546 13,100 369 49 482 14,300 406 50 407 15,480 432 51 332 16,660 461 52 257 17,840 494 53 182 19,020 535 54 103 20,200 574