Question

A 28 year-old man pays $243 for a one-year life insurance policy with coverage of $100,000. If the probability that he will live through the year is 0.9993, what is the 28 year-old man's expected value for the insurance policy?

Answer 1

-$173

Explanation:

The expected value is the sum of products of payments and their respective probabilities.

He pays $243 with probability 1: (-$243)(1) = -$243

He receives $100,000 with probability 1 -0.9993: ($100,000)(0.0007) = $70

The expected value for the man is ...

-$243 +70 = -$173 . . . . a cost of $173