Your friend Tom is the beneficiary of a life insurance policywhere he can choose

Question

Your friend Tom is the beneficiary of a life insurance policywhere he can choose one of three options:

1.

$120,000 in cash upon selecting the option.

2.

$6,000 at the end of each quarter for five years.

3.

$30,000 in cash plus $9,000 at the end of each quarter for 3years.

Tom asks you which option to exercise. What option would yousuggest? Assume an annual interest rate of 12%. (Show yourwork.)

1.

$120,000 in cash upon selecting the option.

2.

$6,000 at the end of each quarter for five years.

3.

$30,000 in cash plus $9,000 at the end of each quarter for 3years.

Explanation / Answer

Calculating PresentValue of Insuarnace Policy: (Using Ms-Excel "PV"Function) (1) Present Value of Insurance Policy(PV) $120,000      (If the payment ismade in Single lump-sum) (2) Calculating Present Value of InsurancePolicy: Interest Rate (Rate) 0.12/4 Number of Periods (Nper) 5*4 Quarterly Payment (PMT) -6,000 Present Value of Insuarnce Policy(PV) $89,264.85 (3) Calculating Present Value of InsurancePoliy: Interest Rate (Rate) 0.12/4 Number of Periods (Nper) 3*4 Quarterly Payment (PMT) -9,000 Present Value of Insuarnce Policy (PV) $89,586.04 30,000 Cash + $89,586.04 = $119,586.04 Present Value of Insurance Policy (PV) $119,586.04 Calculating PresentValue of Insuarnace Policy: (Using Ms-Excel "PV"Function) (1) Present Value of Insurance Policy(PV) $120,000      (If the payment ismade in Single lump-sum) (2) Calculating Present Value of InsurancePolicy: Interest Rate (Rate) 0.12/4 Number of Periods (Nper) 5*4 Quarterly Payment (PMT) -6,000 Present Value of Insuarnce Policy(PV) $89,264.85 (3) Calculating Present Value of InsurancePoliy: Interest Rate (Rate) 0.12/4 Number of Periods (Nper) 3*4 Quarterly Payment (PMT) -9,000 Present Value of Insuarnce Policy (PV) $89,586.04 30,000 Cash + $89,586.04 = $119,586.04 Present Value of Insurance Policy (PV) $119,586.04
Note: Comparing these three options Option (2) is better forselection, because Option(2) has very less Present value ofInsurance Policy cost. Thus, Tom is better to gor Option(2) Calculating PresentValue of Insuarnace Policy: (Using Ms-Excel "PV"Function) (1) Present Value of Insurance Policy(PV) $120,000      (If the payment ismade in Single lump-sum) (2) Calculating Present Value of InsurancePolicy: Interest Rate (Rate) 0.12/4 Number of Periods (Nper) 5*4 Quarterly Payment (PMT) -6,000 Present Value of Insuarnce Policy(PV) $89,264.85 (3) Calculating Present Value of InsurancePoliy: Interest Rate (Rate) 0.12/4 Number of Periods (Nper) 3*4 Quarterly Payment (PMT) -9,000 Present Value of Insuarnce Policy (PV) $89,586.04 30,000 Cash + $89,586.04 = $119,586.04 Present Value of Insurance Policy (PV) $119,586.04

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.