4. You are offered term life insurance by your employer. That means, if you die before...
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4. You are offered term life insurance by your employer. That means, if you die before you retire your family will receive $100.000. You have a safe profession so the chance of death before age 62 is 0.5% any given year (That is, survival probability is 1995). You make $75.000 annually. However, the contract terminates after age 62. You can renew it every year until then. a. What is the expected value of the insurance for a year if you are risk neutral? b. Suppose you value both consumption c in the event you live, and leaving a bequest b to your family if you do not, according to: U=aln(1+c) + (1-r)ln(1) What is your expected utility for the next year if you do not buy the insurance? (Assume you consume all of your income unless you use some of it to purchase life insurance) c. If the life insurance costs $525 annually, What is your expected utility from buying the insurance? Comparing to part (b), do you buy the insurance? 4. You are offered term life insurance by your employer. That means, if you die before you retire your family will receive $100.000. You have a safe profession so the chance of death before age 62 is 0.5% any given year (That is, survival probability is 1995). You make $75.000 annually. However, the contract terminates after age 62. You can renew it every year until then. a. What is the expected value of the insurance for a year if you are risk neutral? b. Suppose you value both consumption c in the event you live, and leaving a bequest b to your family if you do not, according to: U=aln(1+c) + (1-r)ln(1) What is your expected utility for the next year if you do not buy the insurance? (Assume you consume all of your income unless you use some of it to purchase life insurance) c. If the life insurance costs $525 annually, What is your expected utility from buying the insurance? Comparing to part (b), do you buy the insurance?
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a To calculate the expected value of the insurance for a year we need to consider the probability of ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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