EXAMPLE 3 The probability of dying

We can’t predict whether a particular person will die in the next year. But if we observe millions of people, deaths are random. In 2013, the National Center for Health Statistics reported that the proportion of men aged 20 to 24 years who die in any one year is 0.0012. This is the probability that a young man will die next year. For women that age, the probability of death is about 0.0004.

If an insurance company sells many policies to people aged 20 to 24, it knows that it will have to pay off next year on about 0.12% of the policies sold on men’s lives and on about 0.04% of the policies sold on women’s lives. It will charge more to insure a man because the probability of having to pay is higher.