Henri Blanc is a nancial adviser serving high-net-worth individuals in the United States. Alphonse Perrin, age 55, meets with Blanc for advice about coordinating his employee bene ts with his investment and retirement planning strategies.
Perrin has adopted a life-cycle portfolio strategy and plans to retire in 10 years. Recently, he received a promotion and $50,000 salary increase to manage a regional distribution center for a national retail rm. Perrin’s spending needs are currently less than his annual income, and he has no debt. His investment assets consist of $2,000,000 in marketable securities (90% equity/10% xed income) and a vineyard with winery valued at $1,500,000.
Blanc leads Perrin through a discussion of the di erences between his nancial capital and his human capital, as well as between his traditional balance sheet and his economic balance sheet. Perrin is vested in a de ned bene t pension plan based
on years of service and prior salary levels. Future bene ts will vest annually based on his new salary. Perrin makes the following statements regarding his understanding of pension bene ts.
Statement 1 Unvested pension bene ts should be classi ed as human capital.
Statement 2 Vested pension bene ts should not be classi ed as nancial capi- tal until payments begin.
Perrin asks Blanc to compare his traditional and economic balance sheets. Blanc calculates that the sum of the present values of Perrin’s consumption goals and bequests exceeds that of his unvested pension bene ts and future earnings.
Perrin tells Blanc that he expects a slower rate of growth in the US economy. Perrin expresses the following concerns to Blanc.
Concern 1 Holding all else equal, I wonder what the e ect will be on my human capital if the nominal risk-free rate declines?
Concern 2 My employer projects a slower rate of sales growth in my region; there- fore, I am anxious about losing my job.
Perrin is a widower with three adult children who live independently. Perrin’s oldest son wishes to inherit the vineyard; the two other children do not want to be involved. Perrin would like to accommodate his children’s wishes; however, he wants each child to inherit equal value from his estate. Blanc explains potential uses of life insurance to Perrin and suggests that one of these uses best meets Perrin’s immediate needs.
Perrin expresses a preference for a life insurance policy that provides a range of investment options. Perrin selects a policy and asks Blanc to calculate the net payment cost index (per $1,000 of face value, per year), using a life expectancy of 20 years and a discount rate of 5%. Table 1 provides information about Perrin’s policy.
Table 1 Perrin’s Life Insurance Policy
Face value $500,000 Annual premium (paid at beginning of the year) $12,000 Policy dividends anticipated per year (paid at end of the year) $2,000
Cash value projected at the end of 20 years $47,000
The net payment cost index that Blanc should calculate is closest to:
A $17.48. B $20.00. C $20.19.