Question

3. Jim is a 60-year-old male in reasonably good health. He wants to take out a $75,000 term (that is, straight death benefit) life insurance policy until he is 65. The policy will expire on his 65th birthday. The probability of death in a given year is provided by the Vital Statistics Section of the Statistical Abstract of the United States (116^th edition)

X=age	60	61	62	63	64
P(death at this age)	0.01091	0.01192	0.01296	0.01403	0.01513

Jim is applying to Big Rock Insurance Company for his term insurance policy.

1. What is the probability that Jim will die in his 60th year? Using this probability and the $75,000 death benefit, what is the expected cost to Big Rock Insurance?

2. Repeat part (a) for years 61, 62, 63, and 64. What would be the total expected cost to Big Rock Insurance over the years 60 through 64?

3. If Big Rock Insurance wants to make a profit of $850 above the expected total cost paid out for Jim’s death, how much should it charge for the policy?

4. If Big Rock Insurance Company charges $6500 for the policy, how much profit does the company expect to make?

Answer 1

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