Question

Avicenna, a major insurance company, offers five-year life insurance policies to 65-year-olds. If the holder of one of these policies dies before the age of 70, the company must pay

out $22,700 to the beneficiary of the policy. Executives at Avicenna are considering offering these policies for $454 each. Suppose that for each holder of a policy there is a 2% chance that they will die before the age of 70 and a 98% chance they will live to the age of 70. If the executives at Avicenna know that they will sell many of these policies, should they expect to make or lose money from offering them? How much?

Fig: 1

Fig: 2