Question

Suppose a life insurance company sells a ​$220 comma 000 ​one-year term life insurance policy to a 23​-year-old female for ​$190. The probability that the female survives the year is 0.999524. Compute and interpret the expected value of this policy to the insurance company. The expected value is ​$

Answer 1

P(female surviving) = 0.999524

P(female not surviving) = P(insurance company paying the insurance amount) = 1 - 0.999524

= 0.000476

Expected value of the policy to the insurance company = Income to the insurance company - Expected loss to the insurance company

= Insurance premium - Insurance amount x P(insurance company paying the insurance amount)

= 190 - 220,000x0.000476

= $85.28