An insurance company charges a 21-year-old male a premium of $250 for a one-year $50,000 life insurance policy. A 21-year-old male has a 0.9985 probability of living for a year. a. From the perspective of a 21-year-old male (or his estate), what are the values of the two different outcomes?
The value if he lives is
The value if he dies is
dollars.
dollars
b. What is the expected value for a 21-year-old male who buys the insurance?
The expected value is dollars.
c. What would be the cost of the insurance if the company just breaks even in the long run with many such policies), instead of making a profit?
dollars
d. Given that the expected value
negative (so the insurance company can make a profit), why should a 21-year-old male or anyone else purchase life insurance?
A person who buys a one-year policy will expect to make a profit.
Insuring the financial security of loved ones compensates for the negative expected value.
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