Question

Suppose an insurance company sells a disability income insurance policy that will pay the policy holder $100,000 in the event that he must quit his job due to a serious illness. Policy holders pay $200 to purchase the policy. Previous data shows that the probability that a policy holder will have to quit his job due to a serious illness is 1 out of 750.

a) Should the insurance company expect to make a profit off the sale of this policy?

    b)Is the insurance company guaranteed to make a profit on the sale of

       one policy? Explain.

1. Should the insurance company expect to make a profit off the sale

of this policy if it sells a 100,000 policies? Explain

Answer 1