According to survival probability tables, the probability of an 80 year old man

Question

According to survival probability tables, the probability of an 80 year old man living 5 more years is .66. An 80 year old man decides to buy a life insurance policy that will pay $25,000 in the event that he dies during the next 5 years. How much should he be willing to pay for this policy? Show calculations. According to survival probability tables, the probability of an 80 year old man living 5 more years is .66. An 80 year old man decides to buy a life insurance policy that will pay $25,000 in the event that he dies during the next 5 years. How much should he be willing to pay for this policy? Show calculations.

Explanation / Answer

Man should be happy to pay anything less than the expected value of the policy.

P(live)=0.66

P(die)=1-0.66=0.34

Money(death)=25000

Money(Alive)=0

Hence E[Money]=0.66*0+0.34*25000=8500

Hence Old Man should be happy to pay anything less than $8500

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