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

Question

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 $280,000. If the relevant interest rate is 10 percent for the first six years and 7 percent for all subsequent years, what would the value of the deposits be when the policy matures? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

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:

Explanation / Answer

Year Cash flow DF @10% PV 0 780 1 780 1 780 0.909 709.09 2 880 0.826 727.27 3 850 0.751 638.62 4 980 0.683 669.35 5 950 0.621 589.88 NPV 4114.21 Future value of $4114.21 at year 5 or 6th Birthday =1.1^5 * 4114.21 6625.98 Future value of $6625.98 at year 65 =1.07^(59-6) * 6625.98 358833.29 Future value = $358,839.29

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