Question

A person aged 35 has just taken out a home mortgage loan where he will pay $18,000 at the end of each year for 20 years. He was also required to purchase a life insurance policy that will pay any remaining payments should he die within the 20-year period.

(a) If the person dies in the first year, how much is the PV of the death benefit?

(b) Calculate the expected present value of this life insurance policy.

I=5%

(give formulas, no need to calculate

Answer 1

a. The first can be calculated by the simple formula

The future value = 18000, R = 5% and n = 1

b. For this we have to first calculate the future value of the life insurance policy and then bring it to the present value

PMT is the yearly payments which is equal to 18,000 , r is equal to the rate of interest which is 5% and n is the no.of years that the payment is being made for the insurance policy which is equal to 20.

Now when we find the Future Value of the policy, we need to bring it to the present value which can be done by the formula applied in part a. Future Value will be the amount that we found , rate will be 5% and the time(n) will be 20 years.