Question
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Suppose a life insurance company sells a -year term life insurance policy to a 20 -year-old female for . According to the National Vital Report, 58 (21).
the probability that the female survives the year is 0.999544 . Compute and interpret the expected value of this policy to the insurance company.
The expected value is .

Ask by Pearson Tucker. in the United States
Dec 20,2024

Upstudy AI Solution

Tutor-Verified Answer

Answer

The expected value of the policy is $112.48.

Solution

To compute the expected value of the life insurance policy to the insurance company, we’ll consider the two possible outcomes:
  1. Policyholder Survives the Year:
    • Probability:
    • Outcome: The insurance company keeps the premium of $190.
    • Net Profit: $190
  2. Policyholder Passes Away within the Year:
    • Probability:
    • Outcome: The insurance company pays out $170,000 but has already collected $190.
    • Net Loss:
Now, calculate the expected value (E) by considering both scenarios:
Interpretation:
The expected value of the policy to the insurance company is $112.48. This means that, on average, the insurance company expects to earn $112.48 from selling this policy to a 20-year-old female.
Answer:
The expected value is $112.48.

Answered by UpStudy AI and reviewed by a Professional Tutor

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Beyond the Answer

To calculate the expected value for the insurance company, we need to consider the two scenarios: the female survives the year and the female does not survive the year.
  1. If she survives, the insurance company wins the premium: .
  2. If she does not survive, the insurance company loses the policy amount minus the premium: .
Now we use the probabilities for these scenarios:
  • Probability of survival = 0.999544
  • Probability of not surviving = 1 - 0.999544 = 0.000456
The expected value (EV) is calculated as follows:
So, the expected value of this policy to the insurance company is approximately . This means that on average, the insurance company can expect to make about $112.21 per year from this policy after accounting for the risks involved. It’s a nice way to think about risk management in the insurance world!
And who doesn’t love a little math with a dash of life insurance fun?

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