Question

Larry purchased an annuity from an insurance company that promises to pay him $1,500 per month for the rest of his life. Larry paid $165,564 for the annuity. Larry is in good health, and he is 72 years old. Larry received the first annuity payment of $1,500 this month. Use the expected number of payments in Exhibit 5-1 for this problem. How much of the first payment should Larry include in gross income?

Answer 1

Expected return multiple= 14.6

Number ofpayments per year =12 month

Annual payment= 1500

Larry paid  for the annuity =$165,564

Expected total amount :

Annual payment * Number of annual payments per year*Expected return multiple

=$1500*12*14.6

=$262,800.

Calculating Return captial investment

Larry paid  for the annuity / Expected total amount *100

=$165,564/$262,800 * 100

=0,63 * 100%

= 63%

Captial payment = $1500 * 63 %

= $945

Calculating  first payment should Larry include in gross income

Annual payment - Captial payment

= $1500 - $945

= $555

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