# Help! stuck on impossible probability problem...

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• Oct 8th 2009, 01:49 PM
alexM0tts
Help! stuck on impossible probability problem...
I think I have to find out the net profit? I am not sure and I don't even know what formula to use. I definitely know it is not the complementary rules that apply. Here it goes: A 28-year-old man pays $165 for a one-year life insurance policy with coverage of$120,000. If the probability that he will live through the year is 0.9995, what is the expected value for the insurance policy?

Can someone enlighten me and show me how to get this. I'm pretty sure there will be plenty of these on my exam next week. I need some good tutoring, i'm not good in math. Thanks!
• Oct 8th 2009, 06:53 PM
mr fantastic
Quote:

Originally Posted by alexm0tts
i think i have to find out the net profit? I am not sure and i don't even know what formula to use. I definitely know it is not the complementary rules that apply. Here it goes: a 28-year-old man pays $165 for a one-year life insurance policy with coverage of$120,000. If the probability that he will live through the year is 0.9995, what is the expected value for the insurance policy?

can someone enlighten me and show me how to get this. I'm pretty sure there will be plenty of these on my exam next week. I need some good tutoring, i'm not good in math. Thanks!

(0.9995)(165) - (0.0005)(120,000)
• Oct 9th 2009, 03:20 AM
aidan
Quote:

Originally Posted by mr fantastic
(0.9995)(165) - (0.0005)(120,000)

Mr.F

If 10,000 men aged 28 buy a 1 year policy for $165, then the insurance company collects$1,650,000.
The 5 policies pay out $120,000 each for a loss of$600,000.

The difference is $1,050,000. Your formula yields$1,049,175.

Why is there a difference of $825 (= 5 * 165). It almost seems logical that the$165 collected is responsible for a $120,000 loss, but I'm not grasping the whole concept. Would you explain why the$165 would not be part of the total value?
Please.
• Oct 9th 2009, 05:17 AM
CaptainBlack
Quote:

Originally Posted by aidan
Mr.F

If 10,000 men aged 28 buy a 1 year policy for $165, then the insurance company collects$1,650,000.
The 5 policies pay out $120,000 each for a loss of$600,000.

The difference is $1,050,000. [SIZE=4]Your formula yields$1,049,175.

Why is there a difference of $825 (= 5 * 165). It almost seems logical that the$165 collected is responsible for a $120,000 loss, but I'm not grasping the whole concept. Would you explain why the$165 would not be part of the total value?
Please.

Mr F has assumed that the premiums are returned with a claim.

The expected value to the insuree without returned premuims is:

$E=-0.9995\times 165+0.0005(120000-165)$

and minus this to the insurer

CB