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Math Help - Help! stuck on impossible probability problem...

  1. #1
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    Unhappy 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!
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  2. #2
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    Quote Originally Posted by alexm0tts View Post
    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)
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  3. #3
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    Quote Originally Posted by mr fantastic View Post
    (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.
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  4. #4
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    Quote Originally Posted by aidan View Post
    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
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