Chapter 6.1, Problem 17P

Expected Value: Life Insurance Jim is a 60-year-old Anglo 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 Stales (116th edition). We're living longer now! Up-to-date information can be found in the Actuarial Life Table on the Social Security Administration web site.

x = age	60	61	62	63	64
P(death at this age)	0.01191	0.01292	0.01396	0.01503	0.01613

Jim is applying to Big Rock Insurance Company for his term insurance

policy.

(a) What is the probability that Jim will the 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 Jim'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?