Question

Diana has an insurance policy with a cash value at age 65 that will provide payments of $1500 a year for 15 years, first payment at age 66. If the insurance company pays j1 = 5% on its funds, what is the cash value at age 65?

Answer 1

Payment with j1 at 5% = $1500 per year

Payment for 15 years = 1500 x 15

Payment for 15 years = $22,500

Generally, the insurance company will pay its interest rate (j1) annually. Hence, the first year's interst will be paid by the insurance company on second year. As stated in the question, the payment of $1500 includes interest. The insurance was made at the age 65 which carries no interest. Therefore, calculation of cash value at age 65 excludes interest 5%

Calculating Interest Rate :

1500 x 5% = 75

Interest Rate = $75 per year

[Note : Interest Value is calculated annually because there is no indication of monthly interest payments]

Cash Value at age 65 :

1500 - 75 = 1,425

Cash Value of Diana at the age 65 = $1,425