Question

Suppose a life insurance company sells a ​$190,000 ​one-year term life insurance policy to a 19​-year-old female for ​$290. The probability that the female survives the year is 0.999563. Compute and interpret the expected value of this policy to the insurance company.

Answer 1

The expected value of this policy to the insurance company is $206.97

Explanation:

Probability that Person doesn't die = 0.999563. Profit = Revenue - Cost; Profit = $290 - 0 = $290

Probability that Person dies = 1 - 0.999563 = 0.000437. Profit = Revenue - Cost; Profit = $290 - $190,000 = -$189,710

Expected Value E(X) = ∑xp(x)

E(X) = $290*(0.999563) + (-$189,710* 0.000437)

E(X) = $289.87327 - $82.90327

E(X) = $206.97

Thus, the expected value of this policy to the insurance company is $206.97