Robert Weed is considering purchasing life insurance.He must pay a $180 premium for a $100,000 life insurance policy.If he dies this year, his beneficiary will receive $100,000.If he does not die this year, the insurance company pays nothing and Robert must consider paying another premium next year.Based on actuarial tables, there is a 0.001 probability that Robert will die this year.If Robert wishes to maximize his EMV, he would not buy the policy if the EMV were negative for him.He has determined that the EMV is, negative for him, but decides to purchase the insurance anyway.Why?
A)He believes that the actual likelihood of his death occurring in the next twelve months is really much greater than the actuarial estimate.
B)While the EMV is negative, the utility gained from purchasing the insurance is positive, and high.
C)Mr.Weed is not rational.
D)A or C

Question

Quizplus · Accepted Answer

The EMV may be negative for Robert, but he may still choose to purchase the insurance if he derives a positive utility from having the insurance. Utility is a measure of satisfaction or happiness, and Robert may feel better knowing that his beneficiary will be financially secure in the event of his death, even if the probability is low. Therefore, option B is the best choice.

Robert Weed Is Considering Purchasing Life Insurance