Question: Finding Expected Value for a Life Insurance Policy

The CNA Insurance Company charges Mike $250 for a one year, $100,000 life insurance policy. Because Mike is a 21 year old male, there is a 0.9985 probability that he will live for a year (based on data from US National Center for Health Statistics)

1. From Mike’s perspective, what are the values of the two different outcomes?
2. if Mike purchases the policy, what is his expected value?
3. What would be the cost of the insurance policy if the company just breaks even (in the long run with may such policies) , instead of making a profit?
4. Given that Mike’s expected value is negative ( so the insurance company can make a profit), why should Mike or anyone else purchase life insurance?

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Solution: The downloadable solution consists of 1 pages
Deliverable: Word Document