A life insurance company sells a $250,000 1-year term life insurance policy to a
ID: 3334827 • Letter: A
Question
A life insurance company sells a $250,000 1-year term life insurance policy to a 20-year-old male for $350. According to the National Vital Statistics Report, 58(21), the probability that the male survives the year is 0.998734. (a) Fill out the chart below. (Hint: Calculate the money made by the insurance company if the person survives. Then calculate the money lost by the insurance company if the person does not survive. Be sure to use a NEGATIVE number for the money lost by the insurance company)
Explanation / Answer
a) Money made by the insurance company in case the person survives is equal to the premium = $350
and Money made by the insurance company in case the person does not survive is computed as: = $350 - $250,000
= $ -249650
Therefore the expected value of the insurance policy to the insurance company here is computed as:
= Probability that the person survives * Money made by the insurance company in case the person survives + Probability that the person does not survive * Money made by the insurance company in case the person does not survive
= 0.998734*350 - 249650*(1 - 0.998734)
= 349.5569 - 316.0569
= 33.5
Therefore the expected value of the insurance policy to the insurance company is $33.5
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