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!
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.