ACTL3002 Life Insurance and Superannuation Models

Tutorial 4 Questions - For Week 5 Tutorial

Prior to the tutorial attempt the following Exercises from the Dickson et al. exercises. Review your solutions
and check with the Solutions Manual.
Exercise 7.1
Exercise 7.2
Exercise 7.3 (a), (b), (c), (d)
Exercise 7.5
Exercise 7.9
Review the following exercises for discussion at the tutorial. These will be also used for student presentations in tutorials.
1. Suppose that 90,000 lives aged 30 each purchase an ordinary whole life insurance of 1. The net annual
premium is 0.02. If interest rate is at 5% and if the mortality table used provides for 700 deaths at
age 30, compute 1 V30 .
2. An individual aged 25 purchases an ordinary whole life insurance policy. Each year he invests elsewhere
the difference between the net premium for his policy and the corresponding net premium for a twentyyear endowment policy. Approximately what interest rate must he earn on this investment in order
that it may accumulate at the end of twenty years to the difference between the face amount and the
reserve for his policy. You are given the following:
a
25 = 23

a
20| at 3.5% = 14.7

a
45 = 16

a
20| at 4% = 14.1

a
25:20| = 15

d = 0.0338 for i = 3.5%

d = 0.0385 for i = 4%

Explain briefly why the rate he must earn on his investment differs from that used in the calculation
of the annual premium.
3. A large machine in the ABC Paper Mill Company is 25 years old when ABC purchases a 5-year term
insurance paying a benefit in the even the machine breaks down. Calculate the benefit reserve for this
insurance at the end of the third year. You are given the following:
Annual benefit premiums of 6,643 are payable at the beginning of the year.
A benefit of 500,000 is payable at the moment of breakdown.
Once a benefit is paid, the insurance contract is terminated.
Machine breakdowns follow De Moivres Law with `x = 100 x.
i = 6%.
4. Prove the following are true:


1+i
1+i
(a) k Vx = Ax+k 1 +
Px
Px .
i
i
Qk
(b) k Vx = 1 j=1 (1 1 Vx+j1 ).

5. You are given:

k

a
k|

k1| qx

1
2
3
4

1.000
1.930
2.795
3.600

0.33
0.24
0.16
0.11

Calculate 2 Vx:4| .
6. A special endowment assurance issued to a man aged 40 exact has a term of 20 years. A sum assured
of $10, 000 is payable immediately on death, and a sum assured of $15, 000 is payable on survival to
the end of the term.
The policy is secured by annual premiums of P during the first five years, 2P during the second five
years and 3P during the remainder of the term. Premiums are payable annually in advance for 20
years or until death, if earlier.
(a) Find the initial net annual premium for this policy.
(b) Determine the prospective net premium policy value (reserves) at the end of the twelfth policy
year, immediately before the payment of the thirteenth premium.
Basis: AM 92 Ultimate Mortality Table. 4% per annum interest.
7. Consider a life (x) with qx = 0.02, qx+1 = 0.03, and qx+2 = 0.04. Let v = 0.97.
(a) Find the level benefit premium and the benefit reserves for a special 3-year term insurance with
payments of b1 = 10, b2 = 20, and b3 = 15.
(b) Do the same for a 3-year endowment insurance with the death benefits as above and with a
payment of 20 at the beginning of the 4-th year if the insured attains age x + 3.

- End of Tutorial 4 questions -