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jonny · 10-31-2007, 01:35 PM

given the amount of money the man has available to invest, the insurance company is able to offer two alternatives. the first option is to receive $2785 each month for as long as he lives; the second option is to receieve $3500 each month, but for only 20 years (payments will be made to his estate if he should die before that time) the relevant interest rate is 6 percent per year. how long must the man live so that the first option is a better deal?<br /><br />can someone please tell me how to answer this question?<br />i need answer to this question for my finance assignment!!!<br />

goodMOnk · 10-31-2007, 01:35 PM

Life insurance companies are NOT investment firms -- don't get suckered.

Find yourself a good investment consultant who does not work on commission. You'll probably have to pay him a couple hundred buck for advice, but you know it will be more balanced.

goodMOnk · 10-31-2007, 01:35 PM

The break even point is at the age of 91.

If your 65 year old man lives to 91, then all payments after that birthday will be above what the other option pays.

So, in deciding which option is best, you will need to take into consideration his health, family history, any existing health condition, and lifestyle ( smoking, drinking, etc ).

If he has more than a 50% chance of making it to 91, then one might choose the first payment schedule with more confidence. But unexpected events could adversely affect it - a sudden illness, an accident, criminal activity, etc.

Ultimately, you will have to take on a certain degree of risk, but at least you will have information to guide your decision.

deli08 · 10-31-2007, 01:35 PM

You have a straightforward offer that yields a not so surprising answer. Since the insurance company is offering $715 less per month for an open ended committment, it is certainly going to take many more "moons" to capture equal value to the $3,500 for 20yr. offer.

OK, how much longer.

The Present Value(PV) of 240 payments of $3,500 with money worth 6% is $488,532.

It would take 420.3 payments/mo of $2,785 with money worth 6% to yield a Present Value of $488,532.

You would have to live 180 months longer with the second option to get equal value. That would put a 65 year old man all the way up to age 100..... wow!

10-31-2007, 01:35 PM	#1
jonny Greenhorn Join Date: Jul 2006 Posts: 17 Rep Power: 0	a 65 year old man intends to use his retirement funds to purchase an annuity from a life insurance company.? given the amount of money the man has available to invest, the insurance company is able to offer two alternatives. the first option is to receive $2785 each month for as long as he lives; the second option is to receieve $3500 each month, but for only 20 years (payments will be made to his estate if he should die before that time) the relevant interest rate is 6 percent per year. how long must the man live so that the first option is a better deal?<br /><br />can someone please tell me how to answer this question?<br />i need answer to this question for my finance assignment!!!<br />

10-31-2007, 01:35 PM	#2
goodMOnk Greenhorn Join Date: Jul 2006 Posts: 18 Rep Power: 0	a 65 year old man intends to use his retirement funds to purchase an annuity from a life insurance company.? Life insurance companies are NOT investment firms -- don't get suckered. Find yourself a good investment consultant who does not work on commission. You'll probably have to pay him a couple hundred buck for advice, but you know it will be more balanced.

10-31-2007, 01:35 PM	#3
goodMOnk Greenhorn Join Date: Jul 2006 Posts: 18 Rep Power: 0	a 65 year old man intends to use his retirement funds to purchase an annuity from a life insurance company.? The break even point is at the age of 91. If your 65 year old man lives to 91, then all payments after that birthday will be above what the other option pays. So, in deciding which option is best, you will need to take into consideration his health, family history, any existing health condition, and lifestyle ( smoking, drinking, etc ). If he has more than a 50% chance of making it to 91, then one might choose the first payment schedule with more confidence. But unexpected events could adversely affect it - a sudden illness, an accident, criminal activity, etc. Ultimately, you will have to take on a certain degree of risk, but at least you will have information to guide your decision.

10-31-2007, 01:35 PM	#4
deli08 Piggy Bank Join Date: Jul 2006 Posts: 51 Rep Power: 6	a 65 year old man intends to use his retirement funds to purchase an annuity from a life insurance company.? You have a straightforward offer that yields a not so surprising answer. Since the insurance company is offering $715 less per month for an open ended committment, it is certainly going to take many more "moons" to capture equal value to the $3,500 for 20yr. offer. OK, how much longer. The Present Value(PV) of 240 payments of $3,500 with money worth 6% is $488,532. It would take 420.3 payments/mo of $2,785 with money worth 6% to yield a Present Value of $488,532. You would have to live 180 months longer with the second option to get equal value. That would put a 65 year old man all the way up to age 100..... wow!

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