The Problem

A child rider is a supplementary insurance added to an existing policy that provides benefits for the children of the primary insured. The primary benefit is a payment of $1000 in case of the death of any one of the children regardless of the number of children, genetic or adopted. The current cost for a child rider is $6.00. This price was determined in 1953 and has not changed since then. Is this a good price for insurance?

All children of the primary insured are covered by the child rider policy from age 14 days to 21 years. Infants from 0-14 days have the highest mortality rate and are therefore not covered. Is there still a need to not insure infants until after 14 days? Could the age restriction be changed from 14 days to 7 days?

Background Information

The current cost for a �child rider� is $6.00 which provides a death benefit of $1000 until 21. This price was obtained by an non-rigorous �back of the envelope� calculation that assumed an average number of children per policy (2.3) and an average child mortality rate (1/1000). The result was a cost of $2.30 for a thousand dollars of coverage. The company added $3.00 for profit and expenses and then rounded up to obtain the $6.00 annual premium.

Ignoring the nonrigorous methodolgy of the insurance company, how much should the child rider cost to cover the expected claims when

• You don’t know the number of children per family.
• You don’t know the ages of the childred in the family.
• The price was originally computed using life tables from the 1950s.

Materials Included

• Mortality Rates from 1953 & 1999
• List of possibly simplifying assumptions
• Interactive Excel Worksheet