Question

Sana is a physicist and the main income earner for her family. She expects her salary to increase 3.6% per year. She has a $1,000,000 whole life insurance policy with a paid-up additions rider. Under this rider, she is permitted to buy additional coverage of $10,000 per year for the next 15 years, without proving insurability, by making lump-sum payments. Given this scenario which of the following statements is most correct?

Answer 1

The assistance program that reduces government benefits by $1 for every $1 earned may disincentivize work for Susan if her earned income is equal to or less than her potential benefits. Opportunity costs, such as the value of time spent on other endeavors, also play a role in her decisions about work. The program's design needs to balance work incentives with providing adequate support.

Step-by-step explanation:

Impact on Work Incentives and Opportunity Costs

When evaluating the kind of assistance program that reduces government support by $1 for every $1 earned from work, one must consider both the incentives provided for work and the potential opportunity costs. Susan, the single mother who can earn $8 per hour and work up to 1,800 hours a year, would face a decision on how many hours to work given the trade-off between earned income and reduced government benefits. If her working hours result in income less than or equal to the government benefits, Susan might not be incentivized to work more because her total income remains unchanged — a phenomenon known as the 'benefits cliff.'

Opportunity costs come into play when Susan accounts for the time spent working versus time that could be dedicated to other activities like furthering education or caring for her children, which may also impact her decision to work more hours. Therefore, a balance must be struck to ensure Susan is motivated to work while also being able to provide for her family without being disadvantaged by the reduction in government support.