Life Insurance:A life insurance company sells a$250,000 1-year term life policy to a 20-year-old...

Life Insurance:

A life insurance company sells a $250,000 1-year term life policy to a 20-year-old male for $350. According to the National Vital Statistics Report, the probability that the male survives the year is 0.998734.

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a)Compute the expected value.

b)Interpret the expected value of this policy to the insurance company.

Solutions

Expert Solution

a) Money made by the insurance company in case the person survives is equal to the premium = $350

and Money made by the insurance company in case the person does not survive is computed as: = $350 - $250,000

= $ -249650

Therefore the expected value of the insurance policy to the insurance company here is computed as:

= Probability that the person survives * Money made by the insurance company in case the person survives + Probability that the person does not survive * Money made by the insurance company in case the person does not survive

= 0.998734*350 - 249650*(1 - 0.998734)

= 349.5569 - 316.0569

= 33.5

Therefore the expected value of the insurance policy to the insurance company is $33.5

orchestra answered 1 year ago

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