An insurance company is offering a new policy to its customers. An insurance com

Question

An insurance company is offering a new policy to its customers.

An insurance company is offering a new policy to its customers. Typically, the policy is bought by a parent or grandparent for a child at the child's birth. The details of the policy are as follows: The purchaser (say. the parent) makes the following six payments to the insurance company: After the child's sixth birthday, no more payments are made. When the child reaches age 65, he or she receives $360,000. If the relevant interest rate is 12 percent for the first six years and 7 percent for all subsequent years, what is the value of the policy at the child's 65th birthday? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g.. 32.16).) Child's 65th birthday

Explanation / Answer

Future value of six payments at the end of year 6 = $760*1.125 + $760*1.124 + $860*1.123 + $860*1.122 + $960*1.12 + $960 = $6,857.48

Value of $6,857.48 at the end of year 65 i.e. after 59 year = $6,857.48*1.0759 = $6,857.48*54.1555 = $371,370.26

Value of the policy at the child’s 65th birthday = $371,370.26

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