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Suppose you are 45 and have a $110,000 face amount, 15-year, limited-payment, participating policy (dividends will...

Suppose you are 45 and have a $110,000 face amount, 15-year, limited-payment, participating policy (dividends will be used to build up the cash value of the policy). Your annual premium is $385. The cash value of the policy is expected to be $4,400 in 15 years. Using time value of money and assuming you could invest your money elsewhere for a 7 percent annual yield, calculate the net cost of insurance.

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Answer #1
Finding the FV of annuity of $385 for 15 years@7% pa
Formula for future value of Ordinary Annuity :
FV= A [ {(1+k)n-1}/k]
FV = Future annuity value
A = periodical investment=$385
K=interest rate=7% pa
N=periods=15 years
FV =385*[(1.07)^15-1]/7%
FV=$9674.67
So the accumulated value of $385 for 15 years
@7% pa would have been $9674.67
But the value of policy is $4400 in 15 years
So Net cost of Insurance =$9674.67-$4400 =$5,274.67
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