Question

A man wishes to purchase a life insurance policy that will pay the beneficiary $25,000 in the event that the man's death occurs during the next year. Using life insurance tables, he determines that the probability that he will live another year is 0.94. What is the minimum amount that he can expect to pay for his premium? Hint: The minimum premium occurs when the insurance company's expected profit is zero.

Answer 1

Answer:

$1,500

Explanation:

Given that,

A man wishes to purchase a life insurance policy that will pay the beneficiary $25,000 if the man's death occurs in the next year.

The probability that the company pays nothing is 0.94 and there is 0.06 probability that the company pays $25,000.

So, on an average expected loss is as follows:

= 0.94 × $0 + 0.06 × $25,000

= $1,500

Hence, the minimum amount that he can expect to pay for his premium is $1,500.