A person has a 0.16% chance of dying in the next year. A life insurance policy with a \$50,000 death benefit costs him \$125. What is the expected value of the insurance for the person?
a) -$45
b) $45
c) -$117
d) $117
It should be $105 ((1-0.16)*125) but its not in the option.
If the payout on death is $\$50000$ and the probability of dying is $0.16\%=0.0016$, then the present value of the death benefit is $\$80$. But the insured has to pay $\$125$, thus the net value of the insurance is $-\$45$, which is answer a.