The expected value of the policy is the sum of the products of the possible outcomes and their probabilities. In this case, there are two possible outcomes: the insured lives to age 61 and the insured dies before age 61.
The probability of the insured living to age 61 is 0.972, so the probability of the insured dying before age 61 is 1 - 0.972 = 0.028.
If the insured lives to age 61, he will not receive any payout from the policy, so the value of this outcome is 0.
If the insured dies before age 61, he will receive a payout of $1000, but he will have paid $60 in premiums. Therefore, the value of this outcome is $1000 - $60 = $940.
The expected value of the policy is:
(0.972 x 0) + (0.028 x $940) = $26.32
Therefore, the expected value of the policy is $26.32.
A 60-year-old buys a 1-year term life insurance policy worth $1000 and it costs him $60. If his likelihood of living to age 61 is 0.972, what is the expected value of the policy?
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1 answer