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Math Help - unsure with the terms

  1. #1
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    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!
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  2. #2
    Grand Panjandrum
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    Quote Originally Posted by alexandrabel90 View Post
    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


    250- 100000 \times (1-0.9985)=+100 dollars



    They should charge a premium of \$ 150 to break even (this would be the cost of the policy to John if the company just breaks even).

    CB
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  3. #3
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    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.
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  4. #4
    Grand Panjandrum
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    Quote Originally Posted by alexandrabel90 View Post
    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
    Attached Thumbnails Attached Thumbnails unsure with the terms-gash.png  
    Last edited by CaptainBlack; February 14th 2010 at 02:14 AM.
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  5. #5
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    Quote Originally Posted by alexandrabel90 View Post
    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.
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