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 4.1% compounded monthly on the cash value of their policies

Company 2: pays 4.12% 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

APY(Annual Percentage Yield) is the actual rate of return that will be earned in one year if the interest is compounded. It can be calculated as ((1+r/n)^(n*t))-1; where r/n is interest rate per period and n*t is number of periods.

For Company 1:

APR= ((1+4.1%/12)^(1*12))-1= ((1+0.003417)^12)-1

= 1.0417793-1

= 4.18%

For Company 2:

APR= ((1+4.12%/2)^(1*2))-1= ((1+0.0206)^2)-1

= 1.0416244-1

= 4.16%

Higher Yield is offered by company which has higher APR.

So, Company 1 offers higher Yield.