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Student handout

Price a fictional risk transfer

Distinguish expected loss from the value of transferring a low-probability loss a household cannot absorb.

Class period, optional

Class date

Use only the fictional scenario

Do not enter or write personal income, debts, account balances, policy details, names, or identifying information. This activity does not need a name or FinanceLearn account.

Scenario

A fictional event has a 1 percent annual chance of causing a $20,000 covered loss. A fictional policy costs $280 for the year and otherwise matches the stated loss exactly.

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Tasks and response space

  1. 1. Calculate the expected annual loss as probability times loss amount.

  2. 2. Compare the $280 premium with the expected loss and calculate the difference.

  3. 3. Explain why paying $80 above expected loss can still have value for a household that cannot absorb $20,000.

  4. 4. For a second fictional case, enter $80,000 income, 8 years, $150,000 debts, $50,000 existing cover, and $100,000 usable savings in the life insurance needs calculator.

  5. 5. Name two real policy details the simplified expected-loss comparison leaves out.

Extension

Hold the premium fixed and find the loss probability at which expected loss equals $280.

All six activities: classroom lessons.

This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.