Question

A life insurance company charges a 30 year old male a premium of $250 for a $100,000 one-year life insurance policy. Suppose a 30 year old male has a 0.9985 probability of living for a year (based on data from the National Center for Health Statistics). (b) Is it worth for buying this insurance? Why?

Answer 1

Given that

premium amount charged is $250

the insurance amount is $100,000

probability of living = 0.9985

Then, probability of dying = 1-0.9985 = 0.0015

The expected profit from insurance is,

= $100,000 * 0.0015

=$150

Since the expected profit from insurance($150) is less than premium insurance charge ($250), it is not worth buying.