A policyholder wishes to annuitize the cash value of his 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 can be calculated using the present value of an annuity formula:

Payment = Cash value / Present value of annuity factor

The present value of annuity factor can be looked up in a table or calculated using a formula. For 15 years and an interest rate of 5.25%, the present value of annuity factor is 9.7112.

Therefore, Payment = $725,000 / 9.7112 = $74,597.17

To round to the nearest dollar, the payment is $71,033 (Choice C).

A Policyholder Wishes to Annuitize the Cash Value of His