Question

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If a sales aasociate told you that the policy costs $525,000, at what interest rate 2 would this be a fair deal?

Answer 1

The interest rate at which the policy would be a fair deal is 5.7%.

Step-by-step explanation:

To find the interest rate at which the policy would be a fair deal, we can use the concept of present value of a perpetuity. The annual payment of $30,000 can be treated as a perpetuity, and we can use the formula: Present Value = Annual Payment / Interest Rate. In this case, the present value is equal to the cost of the policy, $525,000. By rearranging the formula, we can solve for the interest rate: Interest Rate = Annual Payment / Present Value. Plugging in the given values, the interest rate would be: $30,000 / $525,000 = 0.057 = 5.7% (rounded to the nearest tenth).