An insurance company charges a 21 year old male a premium of $250 for a one year

Question

An insurance company charges a 21 year old male a premium of $250 for a one year $100,000 life insurance policy. A 21 year old male has a 0.999 probability of living for a year.

A) From the perspective of a 21 year old male, what are the values of the 2 different outcomes?

B) What is the expected value for a 21 year old male who buys insurance?

C) What would be the cost of the insurance if the company just breaks even, instaed of making a profit?

D) Given that the expected value is negative (so the insurance company can make a profit), why should a 21-year-old male or anyone else purchase life insurance?

Explanation / Answer

a)value of surviving =-250

value of not surviving =100000-250=99750

b) expected value =100000*(1-0.999)-250=-150

c)

for breakeven cost of insuarance =100000*(1-0.999) =100

d)

even though probability of misfortune event is rare ; to safeguard risk associated with it one must insuarance,

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