"And just in case there are any financial math whizzes and or actuaries lurking out there....If the beneficiaries set up a perpetuity with the life insurance proceeds, at 8% annual effective interest:
$250,000 x (.08/1.08) = $18,518.52"
Can anyone explain to me how the (.08/1.08) was calculated? Thanks
.08/1.08 is the discount rate, which in this example works out to approximately .074. When interest is paid in advance (i.e. you receive your interest at the beginning of the year instead of the end), it is known as discount.
In other words, using my previous example, if you had $250,000, and paid out $18,518.52 at the beginning of the year, you would be left with a principal of $231,481.48. Over the next year, as your principal earns interest at 8 %, it grows back to $250,000 at the end of the year. ($231,481.48 x 1.08 = $250,000.00), and you start the process again.
