You deposit $12,000 annually into a life insurance fund for the next 30 years, after which time...

Question:

You deposit $12,000 annually into a life insurance fund for the next 30 years, after which time you plan to retire.

A. If the deposits are made at the beginning of the year and earn an interest rate of 7%, what will be the amount of retirement funds at the end of year 30?

B. Instead of a lump sum, you wish to receive annuities for the next 20 years (years 31-50). What is the constant annual payment you expect to receive at the beginning of each year if you assume an interest rate of 7% during the distribution period?

Annuity:

An annuity due is featured by a series of cash flows at the beginning of each period. Compared to an ordinary annuity, an annuity due will generate more interests to investors because interest will be counted for an additional period.

Answer and Explanation: 1

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Given information:

  • Annual deposit (PMT) = $12,000
  • N = 30
  • I = 7%

A. Estimate the value of deposits at the end of year 30:

{eq}FV_{30} =...

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What is Annuity? - Definition & Formula

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Chapter 2 / Lesson 7
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Learn about annuities. Understand what an annuity is, examine the annuity formula and learn how to calculate its future value, and see examples of annuities.


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