The probability that a 30-year-old male in the U.S. will die within one year is about 0.00142. An insurance company is preparing to sell a 30-year-old male a one-year, $70,000 life insurance policy. How much should it charge for its premium in order to have a positive expectation for the policy? (Round your answer up to the nearest dollar.)
The expected value of the policy can be calculated by multiplying the insurance payout ($70,000) by the probability of the policyholder dying within a year (0.00142):
Expected Value = $70,000 * 0.00142 = $99.40
Therefore, the insurance company should charge at least $100 for the premium in order to have a positive expectation for the policy.
No. The formula is P(S1) · S1 + P(S2) · S2
Apologies for the confusion.
Using the formula provided, where P(S1) is the probability of the policyholder dying within a year and S1 is the payout amount:
Premium = P(S1) * S1 = 0.00142 * $70,000 = $99.40
Therefore, the insurance company should charge at least $100 for the premium in order to have a positive expectation for the policy.