Suppose a life insurance company sells a $220, 000 one-year term life insurance

Question

Suppose a life insurance company sells a $220, 000 one-year term life insurance policy to a 19-year-old female for $230. The probability that the female survives the year is 0.999536. Compute and interpret the expected value of this policy to the insurance company. The expected value is $ Which of the following interpretation of the expected value is correct? A. The insurance company expects to make an average profit of $229.89 on every 19-year-old female it insures for 1 year. B. The insurance company expects to make an average profit of $11.63 on every 19-year-old female it insures for 1 month. C. The insurance company expects to make an average profit of $20.90 on every 19-year-old female it insures for 1 month. D. The insurance company expects to make an average profit of $127.92 on every 19-year-old female it insures for 1 year.

Explanation / Answer

P(surviving) = 0.999536

P(not surviving) = 1 - 0.999536 = 0.000464

Expected value = 230 * 0.999536 + (-220000) * 0.000464 = 127.81 (ans)

Option-D) is the correct option

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