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