A term life insurance policy will pay a beneficiary a certain sum of money upon

Question

A term life insurance policy will pay a beneficiary a certain sum of money upon the death of the policyholder. These policies have premiums that must be paid annually. Suppose an 18-year-old male buys a $300,000 1 year term life insurance for $475. According to the National Vital Statistics Report, the probability that a male will survive the year is 0.998937. a. Create a probability model for this situation where X-insurance company's"profit" for this policy. (4 points b. Compute the expected value of this policy to the insurance company. Use the correct notation. Expected Value of the Policy:

Explanation / Answer

(300000 - 475) = 299525

a) Values of X = 475 and -299525

P(X = 475) = 0.998937

P(X = -299525) = 1 - 0.998937 = 0.001063

b) E(X) = 475 * 0.998937 + (-299525) * 0.001063 = 156.1

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