Question

The probability that a 19-year-old male in the united states will die within 1 year is approximately 0.001188. if an insurance company sells a 1-year, $25,000 life insurance policy to a 19-year-old for $845, what is the company's expectation (in dollars)?

Answer 1

The insurance company's expectation for the $25,000 life insurance policy for a 19-year-old male is $815.30, which considers the premium received and the probability of death within one year.

Step-by-step explanation:

The company's expectation for the $25,000 life insurance policy sold to a 19-year-old male at $845 can be calculated using the given probability of death within one year, which is 0.001188. The expected payout on death would be 0.001188 * $25,000. Hence, the expected loss per policy due to death is $29.70. The total expectation for the insurance company is the premium received minus the expected loss due to death. This can be calculated as $845 - $29.70, which equals $815.30.

An example from a different context would be an insurance company selling life policies to 50-year-old men, where the risk depends on their family history of cancer. The company must carefully assess risks and set premiums to maintain profitability while offering competitive rates.