expected value?

Question

house is worth 2,000,000. fire insurance is 50 per year. insurance as maximum coverage of 100,000. there is 0.1 percent chance every year house will burn down. What is expected value of keeping the current insurance instead of buying more?

Anonymous · Answer

You have an inflated idea of the value of the house.

No house is worth that much.  Better drop a few zeros

? · Answer

House is 2 mil, coverage is 100k, so part not covered is 1,900,000.  So, .1% * 1.9 mil = $1900.

So, you are "expecting" a $1900 loss every year that you don't buy more insurance.

Anonymous · Answer

so many cheaters.

Anonymous · Answer

You can afford a 2 million  dollar house and don't want to pay another 50??????????

Ender772 · Answer

50 $ a year...wow

Politically Correct · Answer

If you have a mortgage, the lender will insist that the entire value is protected by insurance because the house acts as collateral for the loan.  If you have no mortgage you can decide not to insure or you can insure for the appraised value remembering that you can always lower your premium by taking a larger deductible.  What you cannot do is insure a house for less than its value, no insurance company would take that business. Suppose just your $50,000 kitchen burnt down.  Would you expect them to give you the entire value of the kitchen or just 5% of it?

expected value?

6 Answers