You decided to get disability insurance for the next 2 years. There is a 5% probability that you will have an accident that will call for $50,000 in benefits. How much is this contract expected to cost to the insurance company (annual interest rate i=10%)?
(a) Without taking into account the time value of money, Find the expected cost and risk
(b) Now suppose that there is equal probability that you will get injured in any of the next 2 years. Taking into account the time value of money, Find the expected cost and risk.