Question

Standard Insurance is developing a​ long-life insurance policy for people who outlive their retirement nest egg. The policy will pay out ​$220 comma 000 on your 80 th birthday. You must buy the policy on your 65 th birthday. The insurance company can earn 7.5​% on the purchase price of your policy. What is the minimum purchase price the insurance company should charge for this​ policy? What is the minimum purchase price the insurance company should charge for this​ policy? ​$ nothing  ​(Round to the nearest​ cent.)

Answer 1

Future value= $220,000

Time= 15 years

Interest rate= 7.50%

The question is solved by calculating the present value of the insurance policy using a financial calculator.

Enter the below in a financial calculator:

FV= 220,000; N= 15; I/Y= 7.50

Press CPT and PV to calculate the present value

Therefore, the minimum purchase price the insurance company would pay for the policy would be $74,352.52.