Question

In: Finance

Suppose Lifetime Insurance Company is offering a new policy to the parents of new born babies....

Suppose Lifetime Insurance Company is offering a new policy to the parents of new born babies. The parent will pay $1,000 per year starting on the babies first birthday and will continue until her fifth birthday. After that, no more payments will be made. When the child reaches age 65, he or she receives $500,000. If the relevant interest rate is 10 percent for the ﬁrst five years and 8 percent for all subsequent years, is the policy worth buying?

Expert Solution

Using financial calculator
Input:

PMT = 1000

N = 5

I/Y = 10

Solve for Fv as 6105.1

This is the value at age 5

Using financial calculator
Input:

PV = -6105.10

I/Y = 8

N = 65-5= 60

Solve for FV as 618184.50

This is more than the amount received. Hence the policy is unprofitable.

jeff jeffy answered 2 years ago

Expert Solution

FVOrdinary Annuity = C*(((1 + i )^n -1)/i)

C = Cash flow per period

i = interest rate

n = number of payments

FV= 1000*(((1+ 10/100)^5-1)/(10/100))

FV = 6105.1

Future value = present value*(1+ rate)^time

Future value = 6105.1*(1+0.08)^60

Future value = 618184.5

Not worth it as FV is greater than amount received (500000)

jeff jeffy answered 2 years ago

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Suppose Lifetime Insurance Company is offering a new policy to the parents of new born babies....

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