Future Value and Present Value Issues
Response to the following problem:
Jean Perry has a $25,000 whole-life insurance policy that she began many years ago. She is presently 55 years old. One of the benefits of the policy is that Perry can borrow up to a given amount at 12% interest (2% below the current rate), with the principal due two years after the loan is made. The policy states that should Perry default on the principal payment, it will simply be deducted from the amount given her beneficiary when she dies. However, the interest will continue to accrue as long as the note is not paid. Perry has just borrowed $5,000 on this policy to take a vacation in Hawaii.
Required
Assuming that a woman of Perry's health is expected to live to be 72, explain whether it would be financially advantageous for Perry to repay the principal on the loan in two years. (Calculations are not required.)