You have been quoted a premium of $1,200 per year for $1,000,000 in level-premium term life insurance for 20 years and a premium of $5,375 per year for a permanent life insurance policy with an equivalent face value. If the insurer's rate of return is 5% APY, at what point will the permanent policy generate enough cash value to pay the premiums?

Question

Quizplus · Accepted Answer

The permanent policy's higher premium accumulates cash value over time. At 5% APY, the cash value will grow and eventually be sufficient to cover the annual premium. Calculating the future value of the difference in premiums ($5,375 - $1,200) compounded annually at 5% will show that it takes approximately 16.4 years for the cash value to equal the annual premium of $5,375.

You Have Been Quoted a Premium of $1,200 Per Year