Question

A life insurance company sells a $150,000 one year term life insurance policy to a 21-year old female for $150. The probability that the female survives the year is .999724. Find the expected value for the insurance company.

Answer 1

$149,958.6

Explanation:

The Numerical term to describe that how likely a even could occur or how likely a situation comes true.

Expected value of the insurance is the calculated by multiplying the insurance value with related probability.

Value of insurance = $150,000

Probability = 0.999724

Expected Value = 0.999724 x $150,000 = $149,958.6

Answer 2

EV = $108.56

The expected value for the insurance company is $108.56

Explanation:

Expected value is used by insurance companies to weigh the risk and the benefits on an insurance policy.

EV = P×I - P'×R

Where

P = probability of not dying = 0.999724

P' = probability of dying = (1-0.999724)

I = Investment = $150

R = return = $150,000

EV = 0.999724×150 - (1-0.999724)×150000

EV = $108.5586

EV = $108.56

The expected value for the insurance company is $108.56