Question

Robert Weed is considering purchasing life insurance. He must pay a $180 premium for a $100,000 life insurance policy. If he dies this year, his beneficiary will receive $100,000. If he does not die this year, the insurance company pays nothing and Robert must consider paying another premium next year. Based on actuarial tables, there is a 0.001 probability that Robert will die this year. If Robert wishes to maximize his EMV, he would not buy the policy if the EMV were negative for him. He has determined that the EMV is, negative for him, but decides to purchase the insurance anyway. Why?

Answer 1

Answer: - In my view the benifits with life insurence is always high when comparing with negative EMV every year. So the right decision regarding the above situation is that even his EMV is negative for him, decides to purchase the insurance anyway is because he think off a step forward in worst situation that when he is no more so that he can get premium of $100,000 by his life insurance. As we can say by increasing his EMV can fetch only a certain amount but in respect to his death it is alway very less compared to the benifits of the life insurance premimum based on his probability of death.