Question

A one-year life insurance policy for a 25-year-old male costs $100 and pays $10,000 in case of death during the 25th year. NOTE: The insurance company would not refund the $100 premium, so their net payout in case of death is actually $9900. The probability of death for a 25-year-old male is 0.002.
What is the expected gain per policy for the insurance company?

Answer 1

Answer:

The expected gain per policy for the insurance company is $80

Explanation:

According to the given data we have the following:

Outcome            death          No death

Net gain                     $-9900      $ 100

Probability               0.002     0.998

Therefore, in order to calculate the expected gain per policy for the insurance company we would have to calculate the following formula:

Expected Gain = (-$9900)*(0.002)+($100)*(0.998) = -19.8+99.8= 80

Expected Gain=-$19.8+$99.8=

Expected Gain=$80

The expected gain per policy for the insurance company is $80