Question

Life Insurance: Your company sells life insurance. You charge a 55 year old man $70 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 $70. Based on historical data (relative frequency approximation) the average 55 year old man has a 0.9994 probability of living another year. What is your expected profit on this policy?

Answer 1

$9.96

Step-by-step explanation:

Expected profit for this situation is the priced charged by the insurance policy ($70) multiplied by the probability of the average 55 year old man living another year (0.9994), minus the potential payout ($100,000) multiplied by the probability of the average 55 year old man NOT living another year (1 - 0.9994):

`EP= \$70*0.9994 - \$100,000(1-0.9994)\\EP=\$9.96`

The expected profit on this policy is $9.96