Question

A female 21 year old walks into the insurance company and asks for a $200,000 life insurance policy. This means that her family gets paid $200,000 in the event of her death. The insurance company calculates that the probability of her death within this year is .000243. They decide to charge her $75 over the course of this year for having this policy. Calculate her Expected Payout for this year. E(Payout)=$ Calculate the Expected Profit for the insurance company this year. E(Profit)=$

Answer 1

The expected payout for the insurance policy is $48.60, while the expected profit for the insurance company is $26.40 for the year.

Step-by-step explanation:

The expected payout (E(Payout)) for a life insurance policy is calculated by multiplying the payout amount by the probability of the event happening. In this case, the expected payout is the probability of the 21-year-old's death times the $200,000 payout.

E(Payout) = Probability of death * Payout amount

E(Payout) = 0.000243 * $200,000

E(Payout) = $48.60

The expected profit (E(Profit)) for the insurance company can be calculated by subtracting the expected payout from the premium paid by the policy holder.

E(Profit) = Premium - E(Payout)

E(Profit) = $75 - $48.60

E(Profit) = $26.40