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14. . Life insurance A life insurance company sells a term insurance policy to a 21-year-old male that pays \(100,000if the insured dies within the next 5years. The probability that a randomly chosen male will die each year can be found in mortality tables. The company collects a premium of \)250each year a payment for the insurance. The amount Ythat the company earns on this policy is \(250per year, less the \)100,000that it must pay if the insured dies. Here is a partially completed table that shows information about risk of mortality and the values of Y=profit earned by the company:

(a) Copy the table onto your paper. Fill in the missing values of Y.
(b) Find the missing probability. Show your work.
(c) Calculate the mean Y.Interpret this value in context

Short Answer

Expert verified

(a) The missing value of Ytable is:

Age of death
21
22
23
24
25
26 or more
Profit
-$99,750
-$99,500
-$99,250
-$99,000
-$98750
$1250
Probability
0.00183
0.00186
0.00189
0.00191
0.00193

(b) The missing probability is 0.99058

(c) The mean is 303.3525.

Step by step solution

01

Part (a) Step 1: Given Information

Given in the question that, a21-year-old male pays $100,000If the insured dies within the next 5years. And the company earns on this policy is $250per year.

02

Part (a) Step 2: Explanation 

The client made 1point of $250for 21years old

Therefore, the profit will be calculated as follow:

Profit = Revenue - Cost

E(X)=xp(x)

So,

Profit=250-100000=-99750

The client made 2payments of $250for 22years old:

Therefore, the payment will be:

2250=500

Then, the profit will be calculated as follow:

Profit=Revenue-Cost=500-100000=-99500

The client made 3payments of $250For 23years old:

Therefore, the payment will be :

3250=750

We can calculate the profit as follow

Profit=Revenue-Cost=750-100000=-99250

The client made 4payments of $250for 24years old:

Therefore, the payment will be:

4250=1000

The profit will be calculated as follow

Profit=Revenue-Cost=1000-100000=-99000

03

Part (a) Step 3: Create the table

The client made 5payments of $250for25 years old:
So, 5250=1250

The profit will be:

Profit=Revenue-Cost=1250-100000=-98750

When the customer was 21, he paid off his life insurance policy, and he had already made five payments of$250 each (one payment per year).
So, the profit of the company is then the income of the 5payments.

Profit=Revenue-Cost=1250-0=1250

The complete table is:

Age of death
21
22
23
23
25
26 or more
Profit
-$99,750
-$99500
-$99250
-$99000
-$98750
$1250
Probability
0.00183
0.00186
0.00189
0.00191
0.00193

04

Part (b) Step 1: Given information 

We have to find the missing probability in the given table.

05

Part (b) Step 2: Explanation 

The property of probabilities is,

xp(x)=1
The probability values that are missing can be calculated as follows:

p(Y=-98750)=1-0.00183-0.00186-0.00189-0.00191-0.00193=0.99058

06

Part (c) Step 1: Given information 

The meanYto interpret the value in context.

07

Part (c) Step 2: Explanation 

The mean of Yis determined by:

E(Y)=(-99750)0.00183+(-99500)0.00186+(-99250)0.00189+(-99000)0.00191+(-98750)0.00193+(1250)0.99058=303.3525

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