Question

A 40-year-old man in the U.S. has a 0.248% risk of dying during the next year . An insurance company charges $260 per year for a life-insurance policy that pays a $100,000 death benefit. What is the expected value for the person buying the insurance? Round your answer to the nearest dollar.

Answer 1

The expected value is calculated by multiplying the probability of each outcome by its corresponding value and then summing up all the values. In this case, the possible outcomes are either the man dies and the insurance company pays out the death benefit of $100,000, or he does not die and the insurance company keeps the premium of $260.

Expected value = (probability of death x death benefit) + (probability of no death x premium)

Expected value = (0.00248 x $100,000) + (0.99752 x $260)

Expected value = $248 + $259.38

Expected value = $507.38

Therefore, the expected value for the person buying the insurance is $507.38, rounded to the nearest dollar.