Question

In: Finance

As the beneficiary of a life insurance policy, you have two options for receiving the insurance...

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?

Solutions

Expert Solution

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.


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