Question

In: Statistics and Probability

An insurance company sells a two-year term life insurance policy to an 80-year-old woman. The woman...



An insurance company sells a two-year term life insurance policy to an 80-year-old woman. The woman pays a premium of $1,000 per year. If she dies within one of the insured years, the insurance company will pay $20,000 to her beneficiary. According to the US Centers for Disease Control and Prevention, the probability that an 80-year-old woman will be alive one year later is 0.9516 and the probability that an 80-year-old woman will be alive two years later is 0.9512 Find the expected value for the insurance company for that two year term policy.

Solutions

Expert Solution

if the women dies the first year company will pay (20000-1000) to the women, this happens with probability (1-0.9516)

if the women survive the first year, the company will get $1000, this happens with probability 0.9516

if the women dies the second year company will pay (20000-2000) to the women, this happens with probability (1-0.9512)

if the women survive the first year, the company will get $2000, this happens with probability 0.9512

the expected value for the insurance company for that two year term policy is

=$1056


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