Thread: unsure with the terms

an insurance company charges john $250 for a one year $100,000 life insurance policy. because john is healthy, there is a 0.9985 probabilty that he will live for a yr. what would be the cost of the policy if the company just breaks even instead of make a profit.

my working:

the expected value to john for this polity is = -$ 100

what does it mean by the cost of the policy?

isit $ 100 + $250 = $350?

thanks!

Originally Posted by alexandrabel90

an insurance company charges john $250 for a one year $100,000 life insurance policy. because john is healthy, there is a 0.9985 probabilty that he will live for a yr. what would be the cost of the policy if the company just breaks even instead of make a profit.

my working:

the expected value to john for this polity is = -$ 100

what does it mean by the cost of the policy?

isit $ 100 + $250 = $350?

thanks!

The expected return from the policy to the insurance company is


dollars



They should charge a premium of to break even (this would be the cost of the policy to John if the company just breaks even).

CB

i thought the cost of the policy would be 350 too but the answers in my notes states taht it should be $250 and im wondering why.

Originally Posted by alexandrabel90

i thought the cost of the policy would be 350 too but the answers in my notes states taht it should be $250 and im wondering why.

You may have read an earlier version of the post, look at the current version, and see the attachment.





CB

Originally Posted by alexandrabel90

i thought the cost of the policy would be 350 too but the answers in my notes states taht it should be $250 and im wondering why.

You are probably misreading your notes. $250 was the original cost with the company making a profit. It cannot be also the cost with the company breaking even.

The "break even" cost would be the expected cost to the insurance company- the amount they would have to pay out if John dies multiplied by the probability that he will die this year, 100000(1- 0.9985) as mr. fantastic calculated.