Question

An insurance company charges a​ 21-year-old male a premium of ​$500 for a​ one-year $ 100 comma 000 life insurance policy. A​ 21-year-old male has a 0.9985 probability of living for a year. a. From the perspective of a​ 21-year-old male​ (or his​ estate), what are the values of the two different​ outcomes? The value if he lives is nothing dollars. The value if he dies is nothing dollars. b. What is the expected value for a​ 21-year-old male who buys the​ insurance? The expected value is nothing dollars. c. What would be the cost of the insurance if the company just breaks even​ (in the long run with many such​ policies), instead of making a​ profit? nothing dollars d. Given that the expected value is negative​ (so the insurance company can make a​ profit), why should a​ 21-year-old male or anyone else purchase life​ insurance? A person who buys a​ one-year policy will expect to make a profit. Insuring the financial security of loved ones compensates for the negative expected value.

Answer 1