Question

1. Juanita purchased a life insurance policy on her 60^thbirthday. Her monthly contribution to her life insurance fund is $150. When she dies, her beneficiary will be awarded $100,000. Calculate the expected value of the insurance payout, if she dies exactly 1 year after she purchases the policy. probability of dying between 52-72 = .078

We know, thatif she dies, she will get the full $100,000. But what is the EXPECTED VALUE of her return from the policy at the end of 1 year?

Answer 1

Her monthly contribution to her life insurance fund is $150

Since we are calculating the expected value of policy at the end of 1 year when she dies, total contribution by her to her life insurance fund = $150 * 12 = $3000

probability of dying between 52-72 = 0.078

When she dies, her beneficiary will be awarded $100,000

Probability of not dying = 1 - 0.078

= 0.922

Expected value of her return from the policy at the end of one year = 0.078 * 100000 - 0.922 * 3000

= 7800 - 2766

= $5034

Expected value of her return from the policy at the end of one year = $5034