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Life insurance policies: EMV criterion

ABC insurance sells term life insurance policies. If the policy holder dies during the term of the policy ABC pays out $100,000. If the person does not die ABC pays nothing and there is no further value to the policy. ABC has determined through actuarial tables that an individual with certain issues has a 0.001 chance that they will die during the next year and a 0.999 chance that they will live and the company will pay nothing. The cost of this policy is $200 per year. Based on the EMV criterion should the individual buy this policy? How would utility theory help explain why a person would buy this policy?

Solution Preview

Expected value = 0.001*$100,000 + 0.999*$0 = $100

According to the Utility Theory, the decision ...

Solution Summary

Using the Utility Theory, the solution provides an explanation as to why or why not a person would buy the explained ABC insurance policy.