25. Bill has a whole life policy with a face value of $200,000 and a cost-of-living rider. If the consumer price index has gone up 3%, how much may Bill increase the face value of his policy?
Answer: D
Bill may increase the face value of his policy by $6,000.
With a cost-of-living rider, Bill can adjust the face value of his whole life policy in accordance with inflation. Since the consumer price index has increased by 3%, he can increase the face value by 3% of $200,000, which amounts to $6,000.
A) $300
This option is incorrect because it represents only 0.15% of the face value of the policy. To determine the increase due to the 3% rise in the consumer price index, the calculation of 3% of $200,000 yields a much higher amount.
B) $600
This option is also incorrect as it reflects only a 0.3% increase of the face value. The correct adjustment for the 3% increase should yield a value significantly larger than this.
C) $3,000
While this option represents 1.5% of the face value, it still falls short of the necessary increase based on the 3% cost-of-living adjustment. The calculation clearly shows that Bill's policy should be increased by $6,000, making this answer incorrect.
D) $6,000
This is the correct choice since it accurately reflects a 3% increase on the $200,000 face value of the policy. The calculation for this increase is straightforward: 3% of $200,000 equals $6,000, which aligns perfectly with the terms of the cost-of-living rider.
Conclusion
The correct answer is $6,000 because it directly corresponds to the 3% increase mandated by the consumer price index. All other options fail to account for the full 3% adjustment, demonstrating an inadequate understanding of how the cost-of-living rider functions in relation to policy face value increases.