The real money maker for insurance companies comes from investing free cash. Most insurance companies have a diversified portfolio of fixed income and equities.
Maybe someone can provide a more accurate number but from my back of the envelope calcs, the insurance company would need to earn maybe 5.4 % or so per year to break even. More than that is ...
Why would a life insurance company agree to pay out a nominal amount that is higher than the principal given to them?
As mentioned in other answers, the insurance company is assuming that they will earn a return on the principal they receive from the annuitant which is greater than they are giving the annuitant.
The basic principle behind this is called the ...
The insurance company is expecting to earn more money investing the initial buy in amount ($100k) than it pays out. You need to calculate what the equivalent rate of return is for that $100k. Unless this is also an immediate annuity there is typically a period of time before any payout begins.
There are more criteria for an annuity than you’ve included to ...
Investing like professionals
They are investing the money like a university endowment. When investing money for a very long time, there's a "gold standard" for how to go about it. The rule of thumb is that you expect 4-7% a year growth beyond inflation. Let's assume 6% growth and 2% inflation, or 8%, which is quite in line with how endowments are managed. ...
There are two issues here. The first is that you may run out of money if you live past the age of 85 and the second is that there's the possibility of Alzheimer's disease in which case you're going to need even more money because there will likely to be a need for caregivers.
There are a variety of annuities that address the first issue. I'll take a pass ...
The companies providing the annuities will end up losing money on all their existing annuity obligations.
There are different kinds of annuities: Fixed, Variable, and a many varieties of Structured Index products, etc.
While I can't say that it's true for every Structured Index product, in general, the insurance company has zero risk and collects their fee ...
The company calculates it will make more than the 2.3778% 5.12% annual return it's paying out. That doesn't seem particularly high even these days and might have been very low when the paper you're reading was written.
And it's certainly a much lower rate than almost any other way of getting working capital would cost ;-)
Sorry, was late. The correct ...
Thanks to @D Stanley for the hint
| |deposits |principals** |interest rate |interest*|accumulated interest |
|2nd half 2010 |100 |100 ...
You have to consider that a dollar today is worth more than a dollar in the future.
For your example, the company is willing to sell $159,360 spread out over 20 years, in exchange for $100,000 now, it's because they have determined that they can expect a return from that $100K that exceeds the extra $59,360 that have to pay out over time.
In their ...
The only reason you can calculate the PV of perpetual payments is because of the discount rate; although you have an infinite number of payments, the present value of each payment is decreasing, leading to the values summing to a finite total. If you have growing payments, then if the growth exceeds the discount rate, then overall the present value of each ...
It's not clear in the first example if a payment is also made daily or if just the interest is compounded daily. For the simple case, lets assume that they are the same.
The formula for the payment amount for a loan is:
PV * r
in your example, n=5*365 (5 years), r is 2.8%/365 = 0.000077, and PV is 18,500. So the result is:
I use GNU Octave for problems like these:
A = 1000
N = 10
B = 200
k = 1.0800
octave:5> A*k^N + sum(B*k.^[1:N])
ans = 5288.0
Here I invested 1000 EUR for 10 years at rate of 8% = 0.08, and 200 EUR every year for 10 years at the same rate. At this rate, it will be 5288.0 EUR....
Using a formula for the final value of the compounding deposits
i = 0.07
d = 100
n = 6
r = (1 + i/4)^2 - 1 = 0.0353063
a1 = (d (1 + r) ((1 + r)^n - 1))/r = 678.663
i = 0.05
d = 200
n = 2
r = (1 + i/4)^2 - 1 = 0.0251562
a2 = (d (1 + r) ((1 + r)^n - 1))/r + a1 (1 + r)^n = 1128.46
i = 0.06
d = 200
x = 2000
n = 9
r = (1 + i/4)^2 - 1 = 0.030225
a3 = (d (1 + ...