Elementary Life Contingencies

(part 4)
19/09/2011

Alternative formulas for annuities

A life annuity of 1 p.a. can be regarded as the
p.v. of a sum of random variables, where each
payment is a r.v. that can either be 0 or 1.
If Xn is the payment at time n, then:

E [ X n ] = 1 P [ X n = 1] + 0 P [ X n = 0]
=
n 1

ax:n = v r . r px
..

r =0

a x = v r . r px
..

r =0

Exercises
1. Prove that:
2

r =0

k =0

v r . r px = amini ( k +1,3) .P ( K x = k )
..

2. Derive the relationship between

..

ax:n and ax:n

r =0

r =1

a x = v r . r px = v 0 . 0 px + v r . r px
..

Expected present values of assurances

Definition: Whole-life assurance

Ax expected p.v. of 1 payable at the end

of the year of death of (x).

Ax = E v K x +1
= E g ( K x )

where g ( k ) = v k +1

= v k +1 .P ( K x = k )
k =0

Definition: Endowment assurance

Ax:n expected p.v. of 1 payable at the end of the
year of death of (x), or at time n if sooner.

Ax:n = E g ( K x )

where g ( k ) = ?

How does this differ from a term assurance

and a pure endowment?
How can this be written as a sum of n terms?

Calculating Premiums
Net premium calculation

The net premium is the solution to the

equation of value:
EPV premiums = EPV benefits
Gross premium calculation

The gross premium is the solution to the

equation of value:
EPV premiums = EPV benefits + EPV expenses

Example 1

Calculate the net premium payable annually in

advance for a life currently aged 20, for a benefit
of R1m payable at the end of the year of death
death.
Basis: A1967-70 mortality, 4% p.a. interest.
Tabulated premium factors

Px

Ax
..
ax

Px :n

Ax:n
..

ax :n