Alice is considering purchasing critical illness insurance for herself. The policy has an annual cost of $5000.
Question:
Alice is considering purchasing critical illness insurance for herself. The policy has an annual cost of $5000. And if Alice has been diagnosed with any critical illness within the year of insurance, she would be compensated up to $150,000 (the maximum claim amount). If there is no insurance coverage, an early stage of critical illness (e.g., cancer) would cost about $10,000; an advanced stage of critical illness would cost about $200,000.
Based on Alex’s family profile, the estimated probabilities that an early stage of critical illness and an advanced stage of critical illness would occur are around 3% and 1% respectively.
(a) Using the expected value approach, what decision would Alice make?
(b) If Alice chooses to buy the insurance anyway, what would be the most realistic reason for this decision?
Expert Answer:
a To make a decision using the expected value approach we calculate the expected value of each optio... View the full answer
