You have the opportunity to purchase an insurance policy for your newborn son. Y

ID: 2658986 • Letter: Y

Question

You have the opportunity to purchase an insurance policy for your newborn son. You must make the payments shown in the table. After his fifth birthday no more payments are required. If your son reaches the age of 60, then the insurance company will pay him $90,000. Alternatively, you could invest the money in a savings account. Your banker promises to pay you interest at the rate of 8% for the first 5 years (from now until your son's fifth birthday), but only promises 4% every year after that. Should you buy the policy or invest in the savings account?

First birthday

$600

Second birthday

$650

Third birthday

$700

Fourth birthday

$750

Fifth birthday

$800