Question

"K has a $10,000 traditional whole life policy with a loan outstanding" of $1,000 and a 5% interest charge. At the end of the first year of the loan, K did not pay the loan interest. What is the result of K's inaction?

Answer 1

Answer:

The result of K's inaction causes an increase in the outstanding loan by $50

Explanation:

Step 1: Determine the interest amount

The interest amount can be determined as follows;

I=PRT

where;

I=interest amount

P=principal amount

R=annual interest rate

T=time

In our case;

I=unknown

P=$1,000

R=5%=5/100=0.05

T=1 year

replacing;

I=1,000×0.05×1=$50

Step 2: Determine the total loan amount

This can be expressed as;

A=P+I

where;

A=total loan amount

P=principal amount

I=interest amount

In our case;

A=unknown

P=$1,000

I=$50

replacing;

A=1,000+50=1,050

The loan amount due after a year=$1,050

The result of K's inaction causes an increase in the outstanding loan by $50