Question

EspanolAvicenna, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these policiesdies before the age of 70, the company must pay out $27,400 to the beneficiary of the policy. Executives at Avicenna areconsidering offering these policies for $765 each. Suppose that for each holder of a policy there is a 3% chance that they will diebefore the age of 70 and a 97% chance they will live to the age of 70.00If the executives at Avicenna know that they will sell many of these policies, should they expectto make or lose money from offering them? How much?To answer, take into account the price of the policy and the expected value of the amount paldout to the beneficiary.Avicenna can expect to make money from offering these policies.In the long run, they should expect to make dollars on each policy sold.Avicenna can expect to lose money from offering these policies,

Answer 1

Avicenna can expect to lose money from offering these policies. In the long run, they should expect to lose 57 dollars on each policy sold.

Step-by-step explanation:

If a person lives to the age of 70, they will earn $765. So, there is a 97% chance to earn $765. On the other hand, if a person dies before age of 70, they will lose $26635 because

$27,400 - $765 = 26,635

Then, there is a 3% chance to lose $26635.

Now, we can find the expected value, multiplyion each option by its probability, so:

E = $765(0.97) - (26635)(0.03)

E = $742.05 - $799.05

E = - $57

Since the sign is negative they can expect to lose money, so the answer is:

Avicenna can expect to lose money from offering these policies. In the long run, they should expect to lose 57 dollars on each policy sold.