Question

A person pays $250 per year for life insurance. If they die, their family receives $225,000. The insurance company calculates that their chance of dying is .0009. Round answers to two decimals if needed. What is the expected payout for the insurance company? What is the expected profit for the insurance company?

Answer 1

The expected payout for the insurance company is $202.50, while the expected profit for the insurance company is $47.50 per year.

Step-by-step explanation:

The expected payout for the insurance company is calculated using the probability of the event (in this case, the insured person dying) multiplied by the amount that would be paid out in that event. With a probability of 0.0009 that the person will die, and a payout of $225,000 in that case, the expected payout is 0.0009 * $225,000, which equals $202.50. To find the expected profit for the insurance company, we subtract the expected payout from the amount the person pays for the insurance. Since the premium is $250 per year, the expected profit is $250 - $202.50, which results in $47.50.