Technically, if you split the product into
a) a loan
b) an annuity
which seems to be along the lines you're thinking (but remember that it is one product - take it or not)
Then the annuity pays out £75,000 = 5,000 *15
in return for intial premium of £50,000
which is what we would expect due to discounting (and effects of probailities of dying in 1 year etc).
You may be wondering why the question says £35,000, but this is because you need to take the annuity payments to first pay the tax collector, and the interest on the loan, which leaves £35,000
Going into the need for reserves etc, for the annuity is too complex as an answer to this question.
The crux of the question is that you are taking out a loan, but instead of getting it all at once, you get a lump sum plus annual payments, until the end of the loan (which is at death).
Last edited by a moderator: Jun 6, 2009