Question

In detail show and explain all steps

Martha is 61 years old (born January 2, 1958) and will receive disability payments of $3500. per month till she reaches 65.  

After age 65 she will receive $1750. per month for life. What is the present worth of this policy if she lives until:

a) 80 years

b) 85 years

c) 90 years

Annual interest is 2.5% compounded semi-annually

and what should the insurance company offer her as a payout to make it worth her while

Answer 1

Here we can use following formula

NPR+Interest

Q.A) Up to 80 Years

Disability Payments

=$3500*(12*5)+2.5% Int.

=$105,000+2,625

=$107,625

Life Payments

=$1750*(12*15)+2.5% Int.

=$315,000+7,875

=$322,875

Total Payments up to 80 years = $430,500

Q.B) Up to 85 Years

Disability Payments

=$3500*(12*5)+2.5% Int.

=$105,000+2,625

=$107,625

Life Payments

=$1750*(12*20)+2.5% Int.

=$420,000+10,500

=$430,500

Total Payments up to 80 years = $538,125

Q.C) Up to 90 Years

Disability Payments

=$3500*(12*5)+2.5% Int.

=$105,000+2,625

=$107,625

Life Payments

=$1750*(12*25)+2.5% Int.

=$525,000+13,125

=$538,125

Total Payments up to 80 years = $645,750