Question

Avicenna, a major insurance company, offers five-year life insurance policies to -65 year-olds. If the holder of one of these policies dies before the age of 70 , the company must pay out $24,200 to the beneficiary of the policy. Executives at Avicenna are considering offering these policies for $573 each. Suppose that for each holder of a policy there is a 2% chance that they will die before the age of and 70 a 98% chance they will live to the age of 70.

Answer 1

Answer:

The question is about the least amount to charge each policyholder as premium

The least premium is $484

Step-by-step explanation:

The least amount of premium to charge for this policy is the sum of the expected values of outcome of both instances of policyholder dying before the age of 70 and living after the age of 70 years

expected value of dying before 70 years=payout*probability=$24,200*2%=$484

Expected of living after 70=payout*probability=$0*98%=$0

sum of expected values=$484+$0=$484

Note that payout is nil if policyholder lives beyond 70 years

The premium of $573 means that a profit of $89 is recorded