A forty-five year old woman is considering buying a one-year life insurance policy for $620 with a coverage of $200,000. Suppose the probability for a woman of that age living through the year is 99.75%Based ONLY on this information, should the woman buy the insurance policy?
In this case, the expected value of the insurance policy can be calculated by multiplying the cost of the policy by the probability of the woman not living through the year:
Expected value = $620 * (1 - 0.9975) = $620 * 0.0025 = $1.55
Therefore, the expected value of the insurance policy is $1.55. Since the expected value is significantly lower than the cost of the policy, it may not be worth it for the woman to purchase the insurance policy.