Expected value of insurance

(male storyteller) Okay, a 40-year-old male in the united state has regarding a. 242% risk of passing away throughout the next year. Uh

. an insurance policy firm charges $275 for a life insurance policy plan that pays a $100,000 survivor benefit. In other words, it pays that if the individual passes away during the year. Uh

. otherwise, they-they,  ... you understand, just obtain their $275, as well as the person does not obtain anything. Uh ... so what is the anticipated worth for the individual that's buying the insurance coverage? Um...so-so-so there's two possible outcomes here. Uh

. and also, uh ... so Outcome Number 1, naturally, is-is-is dying, uh ... as well as Result Number 2 is not passing away. And, uh

. each of those has a connected possibility. The possibility of-of dying, presumably, is.00242, and the probability of not passing away, then, is the enhance to that, which is 99758, right-- 1 minus the possibility of passing away. Uh ... and then the value of the end result, uh

. well, the value of ... passing away-- and also I understand we're talking

. we're purely speaking monetary worths here, [laughs] obviously ... not,  ... psychological worths or life value. Uh

. totally financial. After that for the person purchasing the insurance policy as well as their household, uh

. the value of, um ... to them is the $100,000 they get minus the $275 they had to pay for the policy. Uh ... so they have a favorable net benefit of 99,725. Um

. if they don't pass away, then the financial worth of the insurance is an adverse $275. Uh

. so our expected worth after that ... expected value

. is, uh ... the probability ... increased by the worth of the end result

. plus our other chance ... times the worth of its outcome. Uh ... as well as entirely, that offers us an adverse worth of 33. Simply put, if we had, uh

. a number of people, you recognize, countless people, uh ... who are, you recognize, 40 ... hundreds of 40-year-old men, after that usually, the males will have lost $33. Currently it's not surprising that this worth's unfavorable. That's the only method the insurance policy business can afford to provide policies. I mean, that $33, generally, is, uh ... is what's spending for their costs, um

. and also, you recognize, earnings and everything else that enters into a company, um ... for the agents and also everything else. Uh ... as well as truly, the reason that they can pay for to pay out that occasional, uh

.$100,000 benefit is due to all individuals that don't die that stabilize it out. Uh

. so ... you recognize, although this has a negative anticipated worth to the buyer, uh

. there's absolutely safety and security, you recognize, recognizing that your family's taken care of benefits to having insurance policy, which may make that cost worthwhile.