Question

You purchase a life insurance policy which involves making 5 annual premium payments (the first payment starting today). The original premium is $1800 and the premium increases 4% each year. Now assume the insurance company offers you a level payment plan that has the same present value as the payment stream above but where all the premiums are the same. If the insurance company earns 10% compounded annually on its assets, what would the level payments be?

Answer 1

Present value of insurance premiums

=1800+(1800*1.04)/(1+10%)^1+(1800*1.04^2)/(1+10%)^2+(1800*1.04^3)/(1+10%)^3+(1800*1.04^4)/(1+10%)^4

=8070.29

what would the level payments be

=8070.29/(((1-(1+10%)^(-5))/10%)*(1+10%))

=1935.38

the above is answer..