Suppose a life insurance company sells a $170,000 one-year term life, insurance

Question

Suppose a life insurance company sells a $170,000 one-year term life, insurance policy toa 20-year-old female for $280. The probability part the female survives the year is 0.000631. Compute the interpret the expected value of this policy to the insurance company. The expected value is $ square. Which of the following interpretation of the expected value is correct? The insurance company expects to make an average profit of $18.21 on every 20-year-old female it insures for 1 month. The insurance company expects to make an average profit of $279.87 on every 20-year-old female it insures for 1 year. The insurance company expects to make an average profit of $200.27 on every 20-year-old female it insures for 1 year. The insurance company expects to make an average profit of $25.44 on every 20-year-old female it insures for 1 month.

Explanation / Answer

Expected value is calculated by multiplying the corresponding outcomes with their probabilities and then summing them up. In this case it would be ,

E(X)= $280 - 0.999531*$170,000 = $200.27

The correct option is C. The insurance company expects to make an average profit of $200.27 on every 20 year old female it insures for 1 year.

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