The Mutual Assurance and Life Company is offering an insurancepolicy under eithe
ID: 2770977 • Letter: T
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)