A policyholder wishes to annuitize the cash value of her insurance policy at retirement. The cash value is $725,000. What payment (to the nearest dollar)can he expect if he wishes to receive 15 years of payments (starting next year)and interest rates are 5.25 percent?

Question

Quizplus · Accepted Answer

The payment (P) can be calculated using the present value of an annuity formula:

P = C x (PVIFA i%,n)

where: 
C = cash value ($725,000) 
i = interest rate (5.25%) 
n = number of payments (15 years)

PVIFA5.25%,15 = 8.1665 (from financial tables or calculator)

P = $725,000 x 8.1665 
P = $5,914,702.50

Annual payment = $5,914,702.50 / 15 = $394,313.50

Rounding to the nearest dollar, the answer is $71,033 (C).

A Policyholder Wishes to Annuitize the Cash Value of Her