Question
In: Finance
Standard Insurance is developing a long-life insurance policy for people who outlive their retirement nest egg....
Standard Insurance is developing a long-life insurance policy for people who outlive their retirement nest egg. The policy will pay out $250,000 on your 85th birthday. You must buy the policy on your 65th birthday. The insurance company can earn 7% on the purchase price of your policy. What is the minimum purchase price the insurance company should charge for this policy?
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Expert Solution
minimum purchase price the insurance company should charge for this policy should be at least present value of pay out at that time when it is purchased.
Since it will be purchased on my 65th birthday and payout will be on my 85th birthday therefore number of years of period are 20.
So present value = $250,000 / {(1+0.07)^20} = $64604.75
so minimum purchase price the insurance company should charge for this policy is $64,604.75
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