Question

You are the beneficiary of a life insurance policy. the insurance company informs you that 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. you can earn 6 percent on your money. which option should you take and why

Answer 1

So in this case, you would need to find the present value (PV) of the monthly payments. With the information given, you would have a PV= 195,413.08, which is less than the lump sum payment. In this case, you would take the 1 time payment.

Another way to look at this is to calculate the future value (FV) of both payouts. For the lump sum payment, you would assume the same interest rate (6%) and at the end of the same 20 years period, your investment would be worth 662,040.90 while the monthly payment option would be worth 646,857.25