Question

For life insurance policies, some of the premium pays for the cost of the insurance, and the remainder goes toward the cash value of the policy and earns interest like a savings account. Consider the following insurance company options. Company 1: pays 4.9% compounded monthly on the cash value of their policies Company 2: pays 4.93% compounded semiannually on the cash value of their policies What is the APY offered by each company? (Round your answers to the nearest hundredth.)

Company 1 %

Company 2 %

Which company offers a higher yield? Company 1 Company 2

Answer 1

Answer to Question:

Calculation of APY offered by each Company:

APY = ( 1 + r/n)^n - 1

where, r = intrerest rate

n = number of compounding periods per year

APY for Company 1 = (1+0.049/12)^12 - 1 = 5.01%

APY for Company 2 = ( 1+ 0.0493/2)^2 -1 = 4.99%

Which Company offers higher yield:

The Company 1 offers the higher yield out of two.