Question

A man has a 0.193% chance of passing away during the next year. An insurance company charges $370 for a life insurance policy that pays a $120,000 death benefit. What is the expected value for the person buying the insurance? If necessary, round your answer to the nearest cent.

Answer 1

Solution:-

Since man has a 0.193% chance of passing away during the next year.

Probability of the man dying next year

=P(die)

= 0.193/100

= 0.00193

Since insurance company charges $370 for a life insurance policy and pays a $120,000 death benefit.

So, the expected value for the person buying the insurance is

E(x) = 120,000×P(die) - 350×1

E(x) = 120,000×0.00193 - 350

E(x) = 231.60 - 350

E(x) = -118.40 dollars.

Hence, the expected value for the person buying the insurance is -118.40 dollars.