Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 37

A persistent life insurance salesman makes the following pitch: ''At your age (40) a $100,000 whole life policy is a much better buy than a term policy. The whole life policy requires you to pay $2,000 per year for the next 4 years but nothing after that. A term policy will cost you $400 per year for as long as you own it. Let's assume you live 35 more years-that means you'll end up paying $8,000 for the whole life policy and $14,000 for the term policy. The choice is obvious!''
a. Is the choice so obvious? How does the best buy depend on the interest rate?
b. If the interest rate is 10 percent, which policy is the best buy?