Sandy Is Married, Files a Joint Return, and Expects to Be

question 84

Essay

Sandy is married, files a joint return, and expects to be in the 28% marginal tax bracket for the foreseeable future. All of his income is from salary and all of it is used to maintain the household. He has a paid-up life insurance policy with a cash surrender value of $100,000. He paid $60,000 of premiums on the policy. His gain from cashing in the life insurance policy would be ordinary income. If he retains the policy, the insurance company will pay him $3,000 (3%) interest each year. Sandy thinks he can earn a higher return if he cashes in the policy and invests the proceeds.
a.What before-tax rate of return would Sandy be required to earn on the proceeds from cashing in the policy to equal the return earned with the insurance company?
b.Assume Sandy estimates he can earn a 6% before-tax rate of return on the proceeds from cashing in the policy. Assume he can earn a 6% return for the remainder of his life and that he will reinvest all earnings at the same 6% before-tax rate of return. If Sandy expects to live 10 more years, which alternative will yield the greater amount to his beneficiaries upon Sandy's death? (Given: The future value of an annuity in 10 years assuming a 4.32% after-tax return is 12.19. The future value of an annuity in 10 years assuming a 2.16% return is 11.03).

Understand and apply hypothesis testing for comparing means between two groups.

Interpret confidence intervals in the context of the difference between two population means.

Identify and explain the use of t-tests and significance levels in hypothesis testing.

Understand and differentiate between one-tailed and two-tailed tests.

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Definitions:

Assault on Reason

A critique or attack on the use of rational thought and logical argumentation, often implying a decline in public discourse.

Al Gore

A former Vice President of the United States and environmental activist known for his work on climate change awareness.

Political Dialogue

The exchange of views and opinions on political subjects, aimed at understanding different perspectives or reaching consensus.

Critical Thinking Skills

The ability to analyze facts, generate and organize ideas, defend opinions, make comparisons, draw inferences, evaluate arguments, and solve problems.