Athlete Kalen wishes to retire at age forty-five and receive annual birthday payments of $40,000 beginning on his forty-fifth bi
rthday. After his death, the payments on the anniversary of his birth should go to his heirs. In order for Kalen to be able to carry out his plan, he makes contributions to a savings account with a guaranteed annual effective interest rate of 4%. How much money will Kalen need to have accumulated at age forty-five, just prior to his first $40,000 birthday payment
Risk is the exposure to uncertainty. An insurance policy is an exchange of a certain loss (the premium) to have another party (the insurer) absorb all or part of the negative consequence of being exposed to that uncertainty.
<span>For example, you have virtually no risk of dying in an airplane crash if you do not get in an airplane. You are not exposed, other than that a plane could fall on you. Likewise, if you jump out of an airplane without a parachute, there is no risk. You have all the exposure in the world, but it is certain that you will be killed. There may be some trivial risk that you live but it is so small that it can be ignored. </span>
<span>You need two things, uncertainty and exposure. Life insurance is a good example, you know for certain that you will die, you do not know when. The insurer covers you against premature death. Its reverse, the immediate annuity, covers you against living too long and running out of investment resources.</span>
Mr. White was the third and final owner of the talisman in W. W. Jacobs' short story "The Monkey's Paw." He plucked it from the fireplace when the previous owner, Sergeant Major Morris, tossed it there to burn and end the chain of misfortune that came with it. He is motivated mostly by curiosity, since he seems happy with his life and is financially secure.
Mr. White took the paw from his pocket and eyed it dubiously. "I don't know what to wish for, and that's a fact," he said slowly. "It seems to me I've got all I want."