How much money on average will an insurance company make off of a 1-year life insurance...

How much money on average will an insurance company make off of a 1-year life insurance policy worth $50,000, if they charge $800.00 for the policy, and you have a 0.9999 probability of surviving the year?

When I tried solving this, I ended up with $750.72 but the answer key says $795

Solutions

Expert Solution

P(surviving the year) = 0.9999

P(not surviving the year) = 1 - P(surviving the year) = 1 - 0.9999 = 0.0001

Company will gain $800 when the person survives.

Company will loose 50000 - 800 = $49200 when person does not survive.

Expected value = 800 * 0.9999 - 49200 * 0.0001 = $795 (ans)

orchestra answered 2 years ago

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