Question

There is a 0.9989 probability that a randomly selected 33-year-old make lives through the year. A life insurance company charges $195 for insuring that the male will live through the year. if the male does not survive the year, the policy pays out $80,000 as a death benefit. If the 33-year-old male purchases the policy, what is his expected value?

Answer 1

$-107

Explanation:

From the problem we know the probability of randomly selecting a person alive throughout the year: 0.9989

Now, the probability that a person does NOT live would be the complement, that is:

1 - 0.9989 = 0.0011

Now to know the real value of the policy, we must first subtract what he paid for it, that is:

80000 - 195 = $ 79805

Now, to know what the value waiting for that person would be the subtraction of the real value that will be gained by the probability of not living, less what the policy payment for the probability of surviving, thus:

0.0011 * 79805 - 0.9989 * 195 = -107

Which means this man is actually losing $ 107