Question

1.Please complete the following problem.

A life insurance company sells a $ 150,000 1-year term life insurance policy to a 20-year-old female for $120. According to the National Vital Statistics Report, 58(21), the probability that the females survives the year is 0.999544 . Compute and interpret the expected value of this policy to the insurance company.

Answer 1

To compute the expected value of the policy to the insurance company, multiply the amount of the policy by the probability of the insured surviving the year and subtract the premium paid by the insured. The expected value of the policy to the insurance company is $149,811.60.

Step-by-step explanation:

To compute the expected value of the policy to the insurance company, we need to multiply the amount of the policy by the probability of the insured surviving the year, and subtract the premium paid by the insured.

The expected value is calculated as follows:

• Expected value = (Policy amount * Probability of survival) - Premium paid
• Expected value = ($150,000 * 0.999544) - $120
• Expected value = $149,931.60 - $120
• Expected value = $149,811.60

The expected value of the policy to the insurance company is $149,811.60. This means that on average, the insurance company can expect to earn $149,811.60 from each policy sold, after accounting for the probability of the insured surviving and the premium paid.