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

After the child’s sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $400,000.

If the relevant interest rate is 11 percent for the first six years and 7 percent for all subsequent years, what is the value of the policy at the child's 65th birthday? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Expert Solution

First we need to calculate values for 6 years as after year 6 the interest rate changes:

Year	Cash Flow (1)	Future Value Factor @11% (2)	Future Value of Cash Flows (1) * (2)
1	870	(1.11)^5	1466.000595
2	870	(1.11)^4	1320.721257
3	970	(1.11)^3	1326.60207
4	970	(1.11)^2	1195.137
5	1070	(1.11)^1	1187.7
6	1070	(1.11)^0	1070
		Total	7566.160922

Now we will calculate future Value for remaining 59 years (65 - 6)

Future Value of the policy at the child's 65th birthday = 7566.160922 * (1.07)^59

= 7566.160922 * 54.1555391

= 409,749.52

jeff jeffy answered 2 years ago

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

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

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

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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.

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

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