Expected Value Insurance

A life insurance company sells a $250,000.00 life insurance policy to a 28 year old female in good health for an annual premium of $235.00. A 28 year old female in good health has a 0.999965 chance of surviving the year. What is the expected value for the insurance company if they sell 1000 such policies in a year?

• -$75,000

• $75,000

• -$226,250

• $226,250

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PS.SPMD.2

You take out a fire insurance policy on your home. The annual premium is $300. In case of fire, the insurance company will pay you $200,000. The probability of a house fire in your area is 0.0002. 

What is the home owners expected value? 

• $485,406.06

• -$195,406.06

• -$485,406.06

• $195,406.06

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PS.SPMD.2

HINT: Read carefully! And think about the TOTAL amount of money being gained or lost in each situation!

• $275

• $625

• $2,750

• $6,250

Find the expected value. READ CAREFULLY!

• 4.5

• 25.5

• 3.825

• 6.52

An insurance company charges $150 for a policy that will pay for at most one accident. For a major accident, the policy pays $5000; for a minor accident, the policy pays $1000. The $150 premium is not returned. • The company estimates that the probability of a major accident is 0.005, and the probability of a minor one is 0.08. • What is the expected value of the policy to the insurance company?

• 150

• 45

• 55

• 75

• 0.45
• 0.65
• 1.00
• 1.44

• Box A
• Box B
• Box A or B, but not C
• All boxes offer the same expected winnings

Find the expected value

• Loss of $0.875

• Loss of $2.125

• Win of $1.875

• Win of $3.125

If the expected value is negative, are you expected to win?

• yes

• no

If the expected value is positive, are you expected to win?

• yes

• no