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.)

Question

Emery Gillespie

Business

14 November, 08:40

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.)

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Answers (1)

Know the Answer?

Rachel Farley · Answer 1

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.