Question

If a life insurance company sells a $240,000 life insurance policy with a one year term to a 25-year old lady for $210, the probability that she survives the year is .999592. Find the expected value of this policy for the insurance company?

Answer 1

Answer: $112.08

Step-by-step explanation:

Given that,

Life insurance policy = $240,000

Cost = $210

Amount to be paid by company to old lady if she survives (A):

= $240,000 - $210

= $239,790

Probability that she survives (P1) = 0.999592

Probability that she doesn't survives (P2) = 1 - 0.999592

= 0.000408

Expected value of this policy for the insurance company:

= (P1 × cost of policy) - (P2 × A)

= 0.999592 × $210 - 0.000408 × $239,790

= $209.91432 - $97.83432

= $112.08