Question

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why?

Answer 1

Answer:

the option of $200,000 because the value of 1400 for 20 years every monthy is only 195,413.

Explanation:

To determine which is better, we compare the value of $200,000 with the future value of $1400  per month for 20 years at 6 per interest.

The formula  for calculating the future value of annuities is as follows

PV = P × ( 1 − (1+r)−n)/ r

P V= present

P= $1,400

r =6 % or 0.06 % or 0.005 per month

n = 20 years or 240 periods

PV = $1400 x ( 1-(1+0.005]-240)/ 0.005

P=  $1400 x (1-0.3020961415)/0.005

P =$1400 x (0.697903859/0.005)

P= $1400 x 139.5807718

P=$195,413.078

The future value of $1400 at 6 percent for 20 years is $195,413, which is less than $200,000.