The Mutual Assurance and Life Company is offering an insurancepolicy under eithe

Question

The Mutual Assurance and Life Company is offering an insurancepolicy under either of the following two terms: a) Make a series of twelve $1,200 payments at the beginning ofeach of the next 12 years (the first payment being madetoday). b) Make a single lump sum today of $10,000 and receivecoverage for the next 12 years. If you had investment opportunities offering an 8% annualreturn, which alternative would you prefer? The Mutual Assurance and Life Company is offering an insurancepolicy under either of the following two terms: a) Make a series of twelve $1,200 payments at the beginning ofeach of the next 12 years (the first payment being madetoday). b) Make a single lump sum today of $10,000 and receivecoverage for the next 12 years. If you had investment opportunities offering an 8% annualreturn, which alternative would you prefer?

Explanation / Answer

Annual Payment * Present Value of Annuity Due Factor(8%,12)

(a)    $1,200 *8.13896 = $9,766.75

(b)    Single lump sum  = $10,000

Option (a) has $9,766.75. Thus, I would prefer Option(a)

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