Expected amount to pay for a life insurance policy

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ajlec12

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Someone has a 50,000 dollar insurance policy and probability they live another year is .9935. What is the minimum amount he will pay for the policy? I know that it is when the company would break even. So would it be 365?
 
ajlec12 said:
Someone has a 50,000 dollar insurance policy and probability they live another year is .9935. What is the minimum amount he will pay for the policy? I know that it is when the company would break even. So would it be 365?
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We need a better question.

1) "He" would gladly pay $0 for such a policy. That's less than $365.

2) What is the least amount the insurance company would be willing to take? Well, that would depend on the Company's expense structure and investment potential. It is certain to be more than the expected value of the death benefit.

3) What is the expected value of the Death Benefit?
--- 3a) Start with the Death Probability: 50,000 * (1 - 0.9935) = 50,000 * 0.0065 = $325.00 (Not sure where you got $365.00). Anyway, this is not the whole story.
--- 3b) When do we expect to pay the Death Benefit, if we pay it?
-------3bI) Immediately? Pay $50,000 * 0.0065 = $325.00
-------3bII) End of the Year? Pay $50,000 / 1.04 * 0.0065 = $48,076.92 * 0.0065 = $312.50 (I just pulled 4% out of a hat.)
-------3bIII) End of the Month? Pay $50,000 / (1.04 ^ (1/12)) * 0.0065 = $49,836.85 * .0065 = $323.94

4) How much do we have to pay employees to service and agents to sell policy? Or, how about maintaining online systems? We can't pay claims if we are out of business!

There are a few ideas to think about. Which ones matter for your problem?
 
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That's a really cool post. I never knew how to calculate exactly life insurances.
 
In addition to the complexities mentioned by tkhunny, you have also failed to specify what kind of insurance you are talking about. The annual premium for a term policy for one year will not be the same as the annual premium for a term policy for five years.

You have also not taken into account expected variance, which will be more or less important depending on the expected number of insureds.

Taking your example and assuming an annual premium for term insurance for 1 year with no right to renew, all that we can say is that the annual premium will exceed by a material amount

[MATH]50000.00 * (1 - 0.9935) = 50000.00 * 0.0065 = 325.00[/MATH]
 
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