Life insurance company is selling an investment policy that will pay you and your heirs $17,500 per year forever, with the first payment starting today.

Life insurance company is selling an investment policy that will pay you and your heirs $17,500 per year forever, with the first payment starting today. If you require a return on this kind of investment of 6 percent and they sell this policy for $295,000

a) Is this a good investment for you? Show your work.

b) At what rate would you breakeven on this investment, if the first payment is at the end of this year

Expert Solution

a.

Value of investment = 17,500 + 17,500/0.06

Value of investment = $309,167

As it is available for $295,000 so it is a good investment

b.

295,000 = 17,500 + 17,500/r

r = 6.31%

jeff jeffy answered 2 years ago

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