A life insurance company sells a $250,000 1-year term life insurance policy to a

Question

A life insurance company sells a $250,000 1-year term life insurance policy to a 20-year-old female for $200. According to the National Vital Statistics Report the probability that the female survives the year is 0.999544. Compute and interpret the expected value of this policy to the insurance company. There is 0.9868 probability that a randomly selected 30-year-old male lives through the year. A Fidelity life insurance company charges $161 for insuring that the male will live through the year. If the male does not survive the year, the policy pays our $100,000 as a death benefit. If a 30-year-old male purchases the policy, what is his expected value?

Explanation / Answer

Cost of inssurance= $200
P( she dies) = 1-P(she survives) = 1-.999554 = .000446
If she dies then her kin get $250000
Therefore the expected value of policy is =Value - Cost
= .000446*250000-200
= -$88.5

Which means the for the policyholder the expected value is a loss of $88.5

To the company that' a profit of $88.5

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