Fred asked two life insurance companies to give quotes on a 20-year deferred annuity (after a 5-year deferral period) that can be purchased for $100,000. Northwest Mutual quoted payments of $875 payable at the end of each month. Liberty Standard stated that all their annuity options provide a rate of return equal to 5.5% compounded annually. Which should Fred choose?

Learning Objectives

• Familiarize and apply the theories of time value of money for the calculation of present and future worth of different financial tools.
• Ascertain the valuation of annuities and perpetuities, such as ordinary annuities, annuities due, deferred annuities, and perpetuities, with distinct compounding frequencies.
• Analyze different investment options and their returns, including comparing annuity quotes from different companies.