Question

Shortly after Steve graduated from college, he considered a whole life insurance policy that would provide $ 10,000 in life insurance protection and accumulate a cash value of twice his current annual income by age 65. Two years later, after Steve’s marriage, he bought a second policy. Through his working years he paid the $ 280 annual premium per policy. Steve kept remembering what the agent had told him many years before about each policy having a cash value double his annual income. Steve was nearing age 65 and dug out the policies from his safety deposit box so that he could begin to put numbers together to plan his retirement. As he opened the two policies, he was appalled to see that the cash value on the older policy was $ 17,000 and on the newer policy was only $ 15,000. The two policies together amounted to only one third his current annual earnings, far from the figure promised him by the agent.
a. Was the agent being unethical in not showing Steve the potential impact of inflation on the policies’ cash value?
b. Taking just the first policy, would Steve have been better off to invest the $ 280 annual premium in a mutual fund that would have given an annual return of 8% per year (assume a 30 year investment period)?


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  • CreatedOctober 13, 2015
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