Question

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why?

Answer 1

	Present value of annuity	P×[1-(1÷(1+r)^n)]÷r
	Here,
1	Interest rate per annum	6.00%
2	Number of years	20
3	Number of compoundings per per annum	12
4 = 1÷3	Interest rate per period ( r)	0.50%
5 = 2×3	Number of periods (n)	240
	Payment per period (P)	$                                                     1,400.00
	Present value of annuity	$                                  195,413
		1400*[1-(1/(1+0.50%)^240]/0.50%

I will receive lumpsum payment of $200,000.