Expected Value: Life Insurance Mateo is a 60-yearold Latino male in reasonably good health. He wants to take out a $50,000 term (i.e., straight death benefit)

life insurance policy until he is 65. The policy will expire on his 65th birthday. The probability of death in a given year is provided by the Vital Statistics Section of the Statistical Abstract of the United States (116th edition).

x 5 age 60 61 62 63 64 P (death at this age)

0.01191 0.01292 0.01396 0.01503 0.01613 Mateo is applying to Big Rock Insurance Company for his term insurance policy.

(a) What is the probability that Mateo will die in his 60th year? Using this probability and the $50,000 death benefit, what is the expected cost to Big Rock Insurance?

(b) Repeat part

(a) for years 61, 62, 63, and 64. What would be the total expected cost to Big Rock Insurance over the years 60 through 64?

(c) Interpretation If Big Rock Insurance wants to make a profit of $700 above the expected total cost paid out for Mateo’s death, how much should it charge for the policy?

(d) Interpretation If Big Rock Insurance Company charges $5000 for the policy, how much profit does the company expect to make?

AppendixLO1