An insurance company is offering a new policy to its customers. Typically, the policy is bought...

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $750 Second birthday: 750 Third birthday: 850 Fourth birthday: 850 Fifth birthday: 950 Sixth birthday: 950 After the child’s sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $500,000. If the relevant interest rate is 10 percent for the first six years and 8 percent for all subsequent years, is the policy worth buying?

YEAR	VALUE AT YEAR 6
1	?
2	?
3	?
4	?
5	?
6	?
Total Value at Year 6	?
Total Value at Year 65	?

Expert Solution

future value = present value * (1 + interest rate)number of years

We calculate the future value of each payment, compounded up to the child's 65th birthday

First, we calculate the future value of the payments as on 6th birthday using 10% interest rate.

Next, we calculate the future value of the payments as on 65th birthday using 8% interest rate.

Number of years from 6th birthday to 65th birthday = 59 years.

Total future value as on 65th birthday = $605,743

It is not worth buying the policy because the amount received from the insurance company on 65th birthday ($500,000) is lower than the total future value of payments ($605,743)

jeff jeffy answered 2 years ago

An insurance company is offering a new policy to its customers. Typically, the policy is bought...

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $ 870 Second birthday: $ 870 Third birthday: $ 970 Fourth birthday: $ 970 Fifth birthday: $ 1,070 Sixth birthday: $ 1,070 ...

An insurance company is offering a new policy to its customers. Typically, the policy is bought...

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $ 760 Second birthday: $ 760 Third birthday: $ 860 Fourth birthday: $ 860 Fifth birthday: $ 960 Sixth birthday: $ 960 After the child’s sixth birthday, no...

An insurance company is offering a new policy to its customers. Typically the policy is bought...

An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday $ 880 Second birthday 880 Third birthday 980 Fourth birthday 850 Fifth birthday 1,080 Sixth birthday 950 After the child’s sixth birthday, no more payments are made. When...

An insurance company is offering a new policy to its customers. Typically the policy is bought...

An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. For this policy, the purchaser, say, the parent, makes the following six payments to the insurance company: First birthday $ 820 Second birthday $ 820 Third birthday $ 920 Fourth birthday $ 850 Fifth birthday $ 1,020 Sixth birthday $ 950 After the child’s sixth birthday, no more payments are made. When...

An insurance company is offering a new policy to its customers. Typically, the policy is bought...

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $ 880 Second birthday: $ 880 Third birthday: $ 980 Fourth birthday: $ 980 Fifth birthday: $ 1,080 Sixth birthday: $ 1,080 ...

An insurance company is offering a new policy to its customers. Typically, the policy is bought...

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $ 880 Second birthday: $ 880 Third birthday: $ 980 Fourth birthday: $ 980 Fifth birthday: $ 1,080 Sixth birthday: $ 1,080 After the child’s sixth birthday, no...

An insurance company is offering a new policy to its customers. Typically, the policy is bought...

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $ 780 Second birthday: $ 780 Third birthday: $ 880 Fourth birthday: $ 880 Fifth birthday: $ 980 Sixth birthday: $ 980 After the child’s sixth birthday, no...

An insurance company is offering a new policyto its customers. Typically the policy is bought...

An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday $400 Second birthday $500 Third birthday $ 600 Fourth birthday $700 Fifth birthday $800 Sixth birthday $900 After the child’s sixth birthday, no more payments are made....

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth.

How would you solve this using excel formulas, step by step? An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six payments to the insurance company: First birthday: $ 790 Second birthday: $ 790 Third birthday: $ 890 Fourth birthday: $ 890 Fifth birthday: $...

An insurance company is offering a new policy to its customers.Typically the policy is bought...

An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. For this policy, the purchaser, say, the parent, makes the following six payments to the insurance company: First birthday $ 800 Second birthday $ 800 Third birthday $ 900 Fourth birthday $ 850 Fifth birthday $ 1,000 Sixth birthday $ 950 After the child’s sixth birthday, no more payments are made. When...

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An insurance company is offering a new policy to its customers. Typically, the policy is bought...

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