Denisse, a 40 -year-old consultant, purchases a whole life insurance policy with a $400,000 death benefit. The policy includes a cash value component that grows at a fixed interest rate of 3.85% annually. Denisse contributes $7,500 annually to the policy's cash value portion, and the accumulated cash value will continue to grow at the same 3.85% interest rate. What will the cash value portion be after 20 years? Use the formula cap A is equal to the fraction with numerator cap p times open paren open paren 1 plus r over n close paren raised to the n t power minus 1 close paren and denominator open paren r over n close paren
Answer
A
414 dollars comma 696 point 6 7
B
198 dollars comma 480 point 9 3
C
150 dollars comma 000 point 0 0
D
219 dollars comma 891 point 4 8
Explanation
Use the future value formula with annual contributions and annual compounding, so P = $7,500, r = 0.0385, n = 1, and t = 20. Substituting gives A = 7,500 × ((1.0385^20 − 1) ÷ 0.0385) ≈ $219,891.48. The $400,000 death benefit does not affect the cash value calculation, so the cash value is choice B, $219,891.48.
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