Question 1183609: I am using the expected value formula for this and am not solving it properly, can someone please help me with setting it this problem up correctly? Thanks in advance.
A 40-year-old man in the U.S. has a 0.241% risk of dying during the next year . An insurance company charges $260 per year for a life-insurance policy that pays a $100,000 death benefit. What is the expected value for the person buying the insurance? Round your answer to the nearest dollar.
Answer by ikleyn(52800)   (Show Source):
You can put this solution on YOUR website! .
I am using the expected value formula for this and am not solving it properly,
can someone please help me with setting it this problem up correctly? Thanks in advance.
A 40-year-old man in the U.S. has a 0.241% risk of dying during the next year .
An insurance company charges $260 per year for a life-insurance policy that pays a $100,000 death benefit.
What is the expected value for the person buying the insurance? Round your answer to the nearest dollar.
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The person pays $260 to cover next year for a life-insurance policy.
In case of his (or her) death, which may happen with the probability of 0.241% next year, the family will get $100000.
Math expectation of it is 0.00241*100000 = 241 dollar.
So, the expected value for the person is 241 - 260 = - 19 dollars.
In other words, the person pays $19 to the insurance company for the peace in his (or her) mind.
The company collect these $19 for its functioning, paying staff and benefits.
Solved and explained.
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