An insurance company sells a one-year term life insurance policy to an 80-year-old woman. The woman pays a premium of $1000. If she dies within one year, the company will pay $18,500 to her Beneficiary. According to the company's statistics department, the probability that an 80-year-old Woman will be alive one year later is 0.9581. Find the expected value of the insurance company's Profit.

Question

Quizplus · Accepted Answer

The expected value of the insurance company's profit is calculated by considering the probability of the woman surviving and the probability of her dying. If she survives, the company keeps the $1000 premium. If she dies, the company pays $18,500, resulting in a loss of $17,500. The expected profit is: (0.9581 * $1000) + (0.0419 * -$17,500) = $224.85.

An Insurance Company Sells a One-Year Term Life Insurance Policy