Question

In: Finance

Raphael Leung is 25 years old and he is considering purchasing life insurance. A sales person...

Raphael Leung is 25 years old and he is considering purchasing life insurance. A sales person from Matlifer HK provides him with the following information.

Note: The death benefit is equal to the maximum of cash value and 101% of paid premium.

(a) The cash value of the insurance plan is less than the total premium payment for years 1-3. What account for the difference between the two values?

Year

Total Premium Payment

Cash Value

Death Benefit

1

40,000

29,600

40,400

2

80,000

65,600

80,800

3

80,000

74,000

80,800

4

80,000

82,500

82,500

5

80,000

89,200

89,200

  1. (b) Is this product mainly for death protection or for saving purpose?

  2. (c) Why must the death benefit increase with the cash value from year 3 to 5?

  3. (d) Provide two reasons for why cash value is low in the first year.

(3%) (2%) (3%)

(2%)

  1. (e) Raphael Leung wants to use this table to assess the expense cost of the insurer. What

    additional information is needed to calculate the expense cost of the insurer?
    (3%)

  2. (f) ThesalespersontellsRaphaelLeungthathisplanprovideshimanannualrateofreturn of (89200/80000-1)/5=2.3%. What’s wrong with this argument? List at least two fallacies of this statement.

    (4%)

  3. (g) Suppose Raphael survives the 5-year policy period, can you lay out a formula to estimate the average annual return (r) of holding the policy in the 5-year period? You

do not need to solve the equation.

Solutions

Expert Solution

a) The cash value of a life insurance policy equals the total amount of premiums paid minus the cost of insurance and other charges assessed by the Insurance Company. ... Any remaining cash value left once the insured dies either gets added to the death benefit

b) SAid Insurance Product is for Saving Purpose Mainly but risk is also covered.

c) Death Benefit is increased with Cash value becasue in first 3 Years Insurance Agency will covere their own cost and after 3 Years the Bonus and Intrest will add on to both cash value as well as death Benefit.

d) Following are the 2 Main reason (1) In first 3 years Insurance agency recovered their fixed cost (2) Insurance company will also give less amount due to early stage of Life insurance establishment; they need some time period to cover the insurer risk.

e) Sales & Admin, Office rent etc.cost to sale the Insurance policy data needed to calculate the expense which is incured by Insurer

f) Following 2 fallacies in said statment (1) Sales Person calculated Maximum return based on 5th year return data (2) if we calculate this return with first 3 year and on then retun figure will be differ/negative.

g) Formula


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