You are the beneficiary of a life insurance policy. The insurance company inform

Question

You are the beneficiary of a life insurance policy. The insurance company informs you that 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. You can earn 6 percent on your money. Which option should you take and why?

A. You should accept the payments because they are worth $209,414 to you today.
B. You should accept the payments because they are worth $247,800 to you today.
C. You should accept the payments because they are worth $336,000 to you today.
D. You should accept the $200,000 because the payments are only worth $189,311 to you today.
E. You should accept the $200,000 because the payments are only worth $195,413 to you today.

Explanation / Answer

Present value of monthly payments =$1,400/(1+06%/12)+$1,400/(1+6%/12)^2 ....+$1,400/(1+06%/12)^240 =$195,413.08 E. You should accept the $200,000 because the payments are only worth $195,413 to you today.

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