Question 5 (12 marks)

a. Identify the relevant factors that determine the purchasers life insurance objectives. (3 marks)

b. Suppose that you are 30 years old and have a $1,000,000 face amount, 25-year, limited-payment life insurance policy. Your annual premium is $9,000. The cash value of the policy is expected to be $200,000 in 25 years. Using time value of money analysis, and assuming you could invest your money elsewhere for a 8% annual interest return, calculate your net cost of insurance. Show all your calculations. (5 marks)

c. Mr. Pasta, a 62-year old policyholder, decides to convert the cash value of his life insurance policy into an annuity that will last for 18 years. Suppose that the cash value of his life insurance policy is $1,800,000. The annual interest rates are guaranteed at 6%. Calculate the annual payment that Mr. Pasta will receive in each of the following 18-years if he has converted the cash value of his policy into an annuity. Shows all your calculations. (4 marks)