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
E)None of the above

Question

Quizplus · Accepted Answer

Even though the EMV is negative, Robert may still want to purchase the insurance because the potential benefits (i.e. the $100,000 payout) outweigh the monetary cost of the premium. This is because Robert may place a high utility on the peace of mind he will have knowing that his beneficiary will be taken care of if he does pass away. Utility is difficult to quantify and may differ from person to person.

Robert Weed Is Considering Purchasing Life Insurance