Question

You just received an insurance settlement offer related to an accident you had three years ago. The offer provides you with three choices:

Option A: $1,500 a month for 6 years
Option B: $1,025 a month for 10 years
Option C: $85,000 as a lump sum payment today.

You can earn 7.5 percent on your investments and do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period.
Which option should you select and why is that option justified?

Answer 1

You just received an insurance settlement offer related to an accident you had three years ago. The best choice is Option C: $85,000 as a lump sum payment today.

Step-by-step explanation:

Whereas in option A, which is $1,500 a month for 6 years,

you will accumulate a total of $1,500 × 72 = $108,000

For Option B, $1,025 a month for 10 years,

you will accumulate a total of $1,025 × 120 = $123,000

Option C which is $85,000 a a lump payment today is the best option because,

You can invest it at 7.5 percent earnings which will generate

$85,000 × 7.5/100 = $6,375 annually

with an annual earning of $6,375, you can accumulate the following in 6 years

$6,375 × 6 = $38,250

when you add it to the lump sum, you will get

$85,000 × $38,250 = $123,250

Furthermore,

with an annual earning of $6,375, you can accumulate the following in 10 years

$6,375 × 10 = $63,750

when you add it to the lump sum, you will get

$85,000 × $63,750 = $148,750

Therefore, with Option C, you will earn more.

You will get more than option A&B within 6 years and the cumulative sum for 10 years is far better than option B.