Question

According to the tables used by insurance companies, a 47-year old woman has a 0.179% chance of passing away during the coming year. An insurance company charges $204 for a life insurance policy that pays a $100,000 death benefit. What is the expected value for the person buying the insurance?

Answer 1

The expected value for the person buying the insurance is -25.

How the expected value is calculated?

The expected value is the average gain or loss of an event if the event is repeated a number of times.

Expected value = ∑xP(x)

Calculation:

It is given that,

The probability of a 47-year-old woman passing away during the coming year is 0.179% = 0.00179

The death benefit = $100,000 - $204 = $99,796

The loss from living = -204

Then the expected value = 99796(0.00179) + (-204)(0.99821) = -25

Therefore, the expected value for the person buying the insurance is -25.

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