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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 ​$280 comma 000 on your 85 th birthday. You must buy the policy on your 60 th birthday. The insurance company can earn 9​% 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

Payment on 85th birthday = $280,000
Interest rate = 9.00%
Period = 25 years

Present value of payment = Future payment / (1 + Interest rate)^Period
Present value of payment = $280,000 / 1.09^25
Present value of payment = $280,000 * 0.115968
Present value of payment = $32,471

So, insurance company must charge minimum price of $32,471 for this policy

jeff jeffy answered 2 years ago
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