You are the beneficiary of a $200,000 life insurance policy that has both a lump-sum option and an annuity option. The annuity option pays $20,000 per year for a 15-year period beginning at the end of the year. Using your financial calculator or the tables in the book, determine the minimum rate of return you must be assured of earning over the 15-year period if you were to choose the $200,000 lump-sum settlement.

Question

Quizplus · Accepted Answer

To find the minimum rate of return, you can use the present value of an annuity formula. The annuity pays $20,000 per year for 15 years, and you want to find the interest rate that makes the present value of this annuity equal to the $200,000 lump sum. The correct answer, 5.6%, is the rate that equates the present value of the annuity payments to the lump sum option.

You Are the Beneficiary of a $200,000 Life Insurance Policy