Life Insurance: Your company sells life insurance. You charge a 55 year old man $60 for...

Life Insurance: Your company sells life insurance. You charge a 55 year old man $60 for a one year, $100,000 policy. If he dies over the course of the next year you pay out $100,000. If he lives, you keep the $60. Based on historical data (relative frequency approximation) the average 55 year old man has a 0.9995 probability of living another year.

(a) What is your expected profit on this policy?
$

(b) What is an accurate interpretation of this value?

It represents the average profit per policy sold that you would expect if you sold a lot of these policies.It represents the loss on every policy sold. It is meaningless because the insurance company never makes this amount on a policy.It represents the profit on every policy sold.

Solutions

Expert Solution

(a) Expected profit on this policy = $60*0.9995 + (-$100,000*0.0005)

= $9.97

(b) It represents the average profit per policy sold that you would expect if you sold a lot of these policies

orchestra answered 1 year ago

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