Question
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
.
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:
-
Policyholder Survives the Year:
- Probability:
- Outcome: The insurance company keeps the premium of $190.
- Net Profit: $190
- Probability:
-
Policyholder Passes Away within the Year:
- Probability:
- Outcome: The insurance company pays out $170,000 but has already collected $190.
- Net Loss:
- Probability:
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.
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.
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.
- If she survives, the insurance company wins the premium:
. - 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?