Question

Wilma Worker has a $90,000 insurance policy for which she pays $1,200 a year. To compare the cash value of the policy to investing the same amount of money at 6%, she performs the following calculations:

a. Wilma multiplies $1,200 × 1.26
b. Wilma multiplies $1,200 × 1.19
c. Wilma multiplies $1,200 × 1.12
d. Wilma multiplies $1,200 × 1.06
e. Wilma sums the a-d and adds $1,200
f. Wilma calculates the cash value of a $90,000 policy after 5 years

Which of the following steps represents the correct calculation for comparing the cash value of the policy to investing at 6%?

a) Step a
b) Step b
c) Step c
d) Step d
e) Step e
f) Step f

Answer 1

Step b) represents the correct calculation for comparing the cash value of the policy to investing at 6%.

Step-by-step explanation:

Step b) represents the correct calculation for comparing the cash value of the policy to investing at 6%.

When Wilma multiplies $1,200 by 1.19, she is calculating the future value of the $1,200 investment after one year at an interest rate of 6%. This represents the value she would have if she invested the same amount annually in a savings account at a 6% interest rate.

Step b) will give Wilma the correct comparison between the cash value of the insurance policy and the value of investing at 6%.