An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child's birth.
The details of the policy are as follows: The purchaser (say, the parent) makes the following four payments to the insurance company:
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First birthday
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770
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Second birthday
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770
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Third birthday
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870
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Fourth birthday
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850
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After the child's fourth birthday, no more payments are made. When the child reaches age 65, he or she receives $230,000.
If the relevant interest rate is 10 percent for the first four years and 7 percent for all subsequent years, what would the value of the deposits be when the policy matures?
Given this value, would you accept the insurance company's offer?