There is a 0.9988 probability that a randomly selected 30-year-old male lives th

Question

There is a 0.9988 probability that a randomly selected 30-year-old male lives through the year. A life insurance company charges $174 for insuring that the male will live through the year. If the male does not survive the year, the policy pays out $100,000 as a death benefit. Complete parts (a) through (c) below.

a. From the perspective of the 30-year-old male, what are the monetary values corresponding to the two events of surviving the year and not surviving?

The value corresponding to surviving the year is _____________

The value corresponding to not surviving the year is _____________

(Type integers or decimals. Do not round.)

Explanation / Answer

Ans:

The probability that the man would die within one year is 1-.9988 = .0012
So if he dies, the insurance company will have to pay 1,000,000 and if he lives they pay nothing.

The value corresponding to surviving the year is=0.9988*0=0

The value corresponding to not surviving the year is=100000*00012=120

So the expected value of what the insurance company will have to pay is:

$1,000,000*0.0012 + $0*0.9988 = 120
So the premium should be $120

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