Question

Eva is 29 years old and has 2 children, ages 3 and 5.  She makes $48,500 a year.  Eva decides to buy a $400,000 10-year term policy and then renew the policy for another ten years afterwards.  To renew the policy the insurance company charges an extra 40% to her premium rate.  Given the options below, assess whether Eva made a wise decision. a. Eva would have been better off selecting the 20-year term policy. b. Even with the extra charge for renewal, Eva’s plan is the least expensive. c. Given that Eva plans to renew, she should have selected the whole life policy. d. Eva ends up paying the same amount for each policy.

Answer 1

Answer with explanation:

Description about Eva:

1. She is 29 years old, and has 2 children having ages 3 and 5.

2. She decided to buy , a $400,000 10-year term policy and then renew the policy for another ten years afterwards.  

3. For renewal of policy after 10 years , she has to pay 40 % extra.

The present value of money and value of money after 10 years will change, so giving extra 40 % after 10 years is not an issue.

The financial condition of Eva presently is fine, and we can't predict her future, as her children's are growing so after 10 years what will be her financial condition , she is not sure. So, Decision taken by Eva is surely sensible and sharp witted.

Option B:   Even with the extra charge for renewal, Eva’s plan is the least expensive