Question

Present value. Standard Insurance is developing a​ long-life insurance policy for people who outlive their retirement nest egg. The policy will pay out ​$280 comma 000 on your 82 nd birthday. You must buy the policy on your 62 nd birthday. The insurance company can earn 8.5​% on the purchase price of your policy.

What is the minimum purchase price the insurance company should charge for this​ policy?

What is the minimum purchase price the insurance company should charge for this​ policy? ​$ nothing ​(Round to the nearest​ cent.)

Answer 1

Answer:

The minimum purchase price of the policy Standard Insurance should charged is $54,772.59.

Explanation:

The minimum purchased price Standard Insurance should charge should be equal to the present value of the payout $280,000 paid in the 20 years time, with discounting rate is the return the Standard Insurance Co. can earn which is given at 8.5%.

As a result, it will be calculated as:

Minimum purchased price of the policy = Payout amount / (1+8.5%)^20 = 280,000/(1+8.5%)^20 = $54,722.59.

So, the answer is $54,772.59.