Question

The probability a 25 year old male passes away within the year is .001430. He pays $275 for a one year $159000 life insurance policy. What is the expected value of the policy for the insurance company? Round your answer to the nearest cent.

Answer 1

$47.63

Explanation:

You want the expected value of a $159000 life insurance policy for the company if the premium is $275 and the probability it will pay out is 0.001430.

Payout

The expected payout for a given policy is the product of the amount of the payout and the probability of its occurrence:

0.001430 × $159,000 = $227.37

Value

The expected value of the policy to the company is the difference between the premium and the expected payout:

expected value = $275 -227.37 = $47.63

The expected value for the company is $47.63.

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Additional comment

The company must sell about 579 policies to cover the cost of one payout. The probability of having to make more than one payout in that number of policies is about 20%.

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