4 Betty Binomial pays 800 annually for a life insurance poli

4. Betty Binomial pays $800 annually for a life insurance policy which is worth $75,000 when she dies. Let X = Belly?s the net annual profit. Based on mortality data, there is a 0.994 chance that Betty will live until the next year (a) Fill in the probability distribution Use your calculator to find the expected value of the distribution. Use the correct symbols. What is the interpretation of the expected value?

Solution

Thus expected value of the policy = sum of x*P

= -350

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The meaning of expected value here is either he pays 800 for year without any gain or pays 800 and gets 75000 with prob 0.994

Overall gain = -350

Hence it is not profiitable from Betty point of view. But company gets a profit as Expected value for them is +350

	X	P(X)	x*P
Lives	-800	0.994	-795.2
Dies	74200	0.006	445.2
			-350