A 28-year-old man pays $165 for a one-year life insurance policy with coverage of $140000. If the probability that he will live through the year is 0.994, what is the expected value of the insurance policy?
Here, the insurance premium paid is $165.
the probability of survival is 0.994.
the probability of death is 0.006
X is the value of insurance.
The company earns $165 with probability 0.994 and pays out $140000 with probability .006.
expected value of the policy or the expected earning for the company through this policy is worked out as
165 x 0.994 - 140000 x 0.006
164.01 - 840 = - 675.99
i.e the company will lose $675.99