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# LECTURE NOTES IN

LIFE CONTINGENCIES 1

## April 16, 2015

1
1 SURVIVAL DISTRIBUTIONS AND LIFE
TABLES
1.1 Some Special Random Variables and the Survival
Function
Definition 1.1. Let (x) denote a person aged x and X be a random vari-
able representing the age-at-death of (0). We will call X as the age-at-
death (of a newborn) random variable. 

Since X is a random variable, we can talk about its cdf as well as the
complement of its cdf. The cdf of X,

FX (x) = P r[X ≤ x]

gives the probability that (0) will die before attaining age x. Furthermore,
the complement of the cdf of X, which we will denote by s(x), i.e.,

## s(x) = 1 − FX (x) = P r[X > x],

gives the probability that a newborn will survive to age x. Because of this,
we will call s(x) as the survival function.

## Example 1.1. Let us consider some probability statements regarding the

random variable X.
1. Find the probability that (0) dies between ages x1 and x2 .
2. Find the conditional probability that (0) will die between ages x1 and
x2 given survival to x1 .

Definition 1.2. Let T (x) (or simply T ) denote a random variable repre-
senting the future lifetime of (x). We will call T , the time-until-failure
(of a person aged x) random variable. 
The cdf of T , which is G(t) = P r[T ≤ t] gives the probability that (x)
will die before attaining age x + t. This probability statement is given a
special symbol, t qx . The complement of G(t) gives the probability that (x)
will survive to age x + t. The notation we will use to denote this probability
statement is t px . Obviously, t px + t qx = 1.
We note that if x = 0, then T (0) = X and x p0 = s(x), x ≥ 0.
Example 1.2. Express the following probability statements in terms of
the survival function of T and/or its complement.
1. The probability that (x) will survive t years and die within the fol-
lowing u years.
2. The probability that (x) will survive to age x + t then die before
attaining age x + t + 1.

2
Definition 1.3. Let K(x) (or simply K) be a discrete random variable
representing the completed future years lived by x, i.e., K(x) = [T (x)]. We
will call K as the curtate future lifetime of (x). The pmf of K is

## P r[K = k] = P r[k ≤ T < k + 1] = k pxk+1 px = k px qx+k = k| qx

where k = 0, 1, 2, . . .
Recall the survival function, s(x), we mentioned earlier. The survival
function is a continuous function in x, defined on the interval 0 ≤ x ≤ ω,
where ω is called the limiting age. Moreover, s(x) is a decreasing function
with s(0) = 1 and s(ω) = 0. We can express t px and t qx in terms of s(x)
as what the following shows: We first note that x+t p0 = (x p0 )(t px ). Then,

x+t p0 s(x + t)
t px = = ,
x p0 s(x)
and
s(x + t) s(x) − s(x + t)
t qx = 1 − t px = 1 − = .
s(x) s(x)
x
Example 1.3. Let s(x) = 1 − 105 , where 0 ≤ x ≤ 105. Find the following
probabilities.
1. The probability that (0) will survive to age 15.
2. The probability that (0) will die between ages 15 and 42.
3. The probability that a life aged 15 will survive to age 42.
4. The probability that a life aged 15 will die before attaining age 42.

## 1.2 Force of Mortality

Suppose FX (x) and fX (x) are respectively, the cdf and pdf of the random
variable X. Recall that,

0 FX (x + ∆x) − FX (x)
FX (x) = lim = fX (x).
∆x→0 ∆x
Then,
FX (x + ∆x) − FX (x)
P r[x < X ≤ x + ∆x|X > x] =
1 − FX (x)
FX (x + ∆x) − FX (x) ∆x
=
∆x 1 − FX (x)
∆x
≈ fX (x)
1 − FX (x)
fX (x)
= ∆x
1 − FX (x)
fX (x)
The expression 1−F X (x)
gives the conditional pdf of X at exact age x
given survival to x. This conditional pdf is called the force of mortality and

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is denoted by µ(x). The force of mortality is also called the failure rate or
the hazard rate.
Consider the following,
d d d
s(x) = [1 − FX (x)] = − FX (x) = −fX (x).
dx dx dx
Thus,
fX (x) s0 (x)
µ(x) = =− .
1 − FX (x) s(x)
Moreover, since s(x) is a decreasing function, then s0 (x) < 0, thus the force
of mortality is a nonnegative function.
We now find an expression for the pdf of X in terms of the force of
mortality. We know that

s0 (y) d
µ(y) = − = − log s(y),
s(y) dy

or equivalently,
−µ(y)dy = d log s(y).
Integrating from x to x + n,
Z x+n Z x+n
s(x + n)
− µ(y)dy = − d log s(y) = log s(x+n)−log s(x) = log = log n px .
x x s(x)

## This shows that

R x+n
n px = e− x
µ(y)dy
.
If we let s = y − x, we have
Rn
n px = e− 0
µx (s)ds
.

## Letting x = 0 and replacing n by x, we have

Rx
s(x) = x p0 = e− 0
µx (s)ds
.
It follows that,

d d d h Rx i d Rx
f (x) = FX (x) = [1 − s(x)] = 1 − e− 0 µx (s)ds = − e− 0 µx (s)ds
dx dx Z x dx dx
− 0x µx (s)ds
R d
= e µx (s)ds = x p0 µ(x).
dx 0

## We now find the pdf of T .

4
 
d d d s(x + t)
gT (t) = GT (t) = t qx = 1−
dt dt dt s(x)
 0 
1 0 s(x + t) s (x + t)
= − s (x + t) = − = t px µx (t).
s(x) s(x) s(x + t)
Thus, the pdf of T is

gT (t) = t px µx (t).

Clearly, t px µx (t) denotes the probability that (x) dies between ages x+t
and x + t + dt and Z ∞
t px µx (t)dt = 1.
0

## 1.3 Life Tables

Let l0 be the number of newborns in a cohort (a closed group). We call this
group of newborns, a random survivorship group. Each newborns’s age-at-
death has a distribution specified by the survival function s(x). Let each
life in the group be indexed by j = 1, 2, . . . , l0 and let L(x) be a discrete
random variable representing the number of survivors to age x out of the
l0 lives in the cohort. Thus,
l0
X
L(x) = Ij ,
j=1

## where Ij is the indicator function, i.e.,


1 if j survives to age x
Ij =
0 otherwise.
We know that, Ij has a Bernoulli distribution and that E[Ij ] = s(x). It
follows that
Xl0 Xl0
E[L(x)] = E[Ij ] = s(x) = l0 s(x).
j=1 j=1

## If we denote E[L(x)] by lx , then lx represents the expected number of

survivors to age x among the l0 newborns. It follows then, that
lx
s(x) = .
l0
We note that if the Ij ’s are independent, then L(x) has a binomial distri-
bution with parameters n = l0 and p = s(x).
Let n Dx be a discrete random variable representing the number of deaths
between ages x and x + n among the l0 lives in the cohort. We can see
that n Dx has a binomial distribution with parameters n = l0 and p =
s(x) − s(x + n). Thus,

## E[n Dx ] = l0 [s(x) − s(x + n)] = lx − lx+n .

5
We will use the notation n dx for E[n Dx ], thus n dx denotes the expected
number of deaths between ages x and x + n among the l0 newborns.
Now, since s(x) = llx0 ,
d d
s(x) lx
µ(x) = − dx = − dx ,
s(x) lx
or equivalently,
d
lx = −lx µ(x).
dx
The expression lx µ(x) is the expected density of deaths in the age interval
(x, x + dx). Furthermore,

µ(x)lx dx = −dlx .

## Integrating both sides from x to x + n, gives

Z x+n Z x+n
µ(y)ly dy = (−dly ) = −ly ]x+n
x = lx − lx+n .
x x

## Example 1.4. Given s(x) = 1 − 0.005x − 0.00005x2 , construct the lx and

dx columns of the corresponding mortality table for age 0 to 2 using the

## 1.4 Other Life Table Characteristics

We have introduced the random variables T and K. We now talk about
their expected values.
We will denote the expected value of T by eox , called the complete-
expectation-of-life. Thus,
Z ∞ Z ∞ Z ∞
o ∞
ex = E[T (x)] = tt px µx (t)dt = t(−dt (t px )) = t(−t px )]0 + t px dt.
0 0 0
R∞
However, if we assumed that E[T (x)] exists then lim t(−t px ) and 0 t px dt
R∞ t→∞
both exists, i.e., lim t(−t px ) < ∞ and 0 t px dt < ∞. Furthermore,
t→∞

lim t(−t px ) = 0.
t→∞

Therefore,
Z ∞
eox = E[T (x)] = t px dt.
0

## Similarly, assuming that E[T (x)2 ] exists, it can be shown that

Z ∞ Z ∞
E[T (x)2 ] = t2 t px µx (t)dt = 2 tt px dt.
0 0

Thus,

6
Z ∞
V ar[T (x)] = E[T (x)2 ] − (E[T (x)])2 = 2 tt px dt − (eox )2 .
0

We note that we assumed above that E[T (x)] and E[T (x)2 ] exist. More-
over, we can also find the median and the mode of the distribution of T (x).
If we denote the median of T (x) by m(x), then the median of T (x) is the
solution of the equation
1 s(x + m(x)) 1
P r[T (x) > m(x)] = or = .
2 x 2
The mode of the distribution of T (x) is the value t where the pdf of T , i.e.,
the function gT (t) = t px µx (t) attains its maximum value.
The expected value of K(x) is denoted by ex , and is called the curtate-
expectation-of-life. Thus,

X ∞
X ∞
X
ex = E[K(x)] = k k px qx+k = k∆(−k px ) = k(−k px )]∞
0 + k+1 px .
k=0 k=0 k=0

Using the same argument as above, then if E[K(x)] exists then lim k(−k px ) =
k→∞
0. Thus,

X
ex = E[K(x)] = k px .
k=1

Also,

X ∞
X ∞
X
E[K(x)2 ] = k 2 k px qx+k = ∆(−k px ) = k 2 (−k px )]∞
0 + (∆k 2 )(k+1 px )
k=0 k=0 k=0

## Then, again if E[K(x)2 ] exists, then lim k 2 (−k px ) = 0, thus

k→∞

X ∞
X
2
E[K(x) ] = (2k + 1)k+1 px = (2k − 1)k px .
k=0 k=1

Therefore,

X
V ar[K(x)] = E[K(x)2 ] − (E[K(x)])2 = (2k − 1)k px − (ex )2 .
k=1

Another life table function is Lx , which denotes the total expected num-
ber of years lived between ages x and x + 1 by the survivors of the l0
lives.Thus,
Z 1
Lx = lx+1 + tlx+t µx (t)dt,
0
where lx+1 represents the years lived between ages x and x + 1 of those
R1
who survive to age x + 1, and 0 tlx+t µx (t)dt represents the years lived by
those who died between ages x and x + 1.

7
Our expression for Lx may be simplified in the following way:
Z 1 Z 1 Z 1
Lx = lx+1 + tlx+t µx (t)dt = lx+1 − tdt lx+t = lx+1 −tlx+t ]10 + lx+t dt,
0 0 0

or equivalently, Z 1
Lx = lx+t dt.
0
In this form, we can say that Lx is the mean value of lx over the age interval
(x, x + 1). An approximation for Lx is given by
1 1
Lx ≈ (lx+1 + lx ) = lx − dx .
2 2
Another life table function is the central death rate over the age interval
(x, x + 1), denoted by mx and defined as
R1
0
lx+t µx (t)dt −lx+t ]10 lx − lx+1 dx
mx = R1 = = = .
l dt Lx L x Lx
0 x+t
If we extend the age interval from (x, x + 1) to (x, x + n), then the
definitions of Lx and mx can be extended appropriately as follows:
Z n Z n
L
n x = nlx+n + tl µ
x+t x (t)dt = lx+t dt,
0 0

and Rn
l µ (t)dt
0 R x+t x lx − lx+n n dx
n mx = n = = .
l dt
0 x+t
L x Lx
Another life table function is Tx which denotes the total number of years
lived beyond age x by the l0 lives. Thus,
Z ∞ Z ∞ Z ∞
Tx = tlx+t µx (t)dt = − tdt lx+t = lx+t dt.
0 0 0

## We note that Tx = lim t Lx and that the average number of years of

t→∞
future lifetimes of the lx survivors of the l0 lives at age x is
R∞ Z ∞
Tx lx+t dt o
= 0 = t px dt = ex .
lx lx 0

## 1.5 Assumptions for Fractional Ages

The life table exhibits some function like lx and dx , as well as some prob-
abilities like px and qx . However the age x in these functions are always
integral values. If we want to find the values of these functions when the
age is say x + s, where x is an integer and s is between 0 and 1, we need to
make cetain assumptions regarding fractional ages. These assumptions are
called the uniform death distribution (UDD), the constant force of mortality
and the Balducci. These are also called linear, exponential and hyperbolic
assumptions respectively.

8
Definition 1.4. Suppose x is an integer and t is a real number such that
0 ≤ t ≤ 1. The the survival function using the given functional age as-
sumptions are as follows:
1. Uniform death distribution: s(x + t) = (1 − t)s(x) + ts(x + 1);
2. Constant force of mortality: s(x + t) = s(x)eµt , where µ = − log px ;
1 1−t t
3. Balducci: s(x+t) = s(x) + s(x+1

## Prob. Theory Functions for Fractional Ages, x is an integer and 0 ≤ s, y ≤ 1

UDD Constant Force Balducci
of Mortality
px
t qx tqx 1 − e−µt 1−(1−t)qx
tq
t px 1 − tqx e−µt x
1−(1−t)qx
yqx −µy yqx
y px+t 1−tqx 1−e 1−(1−y−t)qx
qx qx
µx (t) 1−tqx µ 1−(1−t)qx
px qx
t px µx (t) qx e−µt µ [1−(1−t)qx ]2

Example 1.5. Given s(40) = 0.7746 and s(41) = 0.7681. Find µ40 ( 14 ),
using the three fractional age assumptions.
Example 1.6. Using the UDD assumption, show that t qx = tqx , 0 ≤ t ≤ 1.
Example 1.7. Using the constant force of mortality assumption, show that
µx (t) = µ.

## 1.6 Some Analytical Laws of Mortality

We now discuss some laws that try to explain the mortality of lives at
different ages.

## 1. De Moivre’s law suggests that the lx function is a linear function

in x. Thus, lx = k(ω − x), where ω is the limiting age. But since
lx = l0 s(x), then under De Moivre’s law
x
s(x) = 1 − .
ω
The corresponding force of mortality is:
1
µ(x) = .
ω−x

## 2. Gompertz assumed that man’s power to resist death decreases at a

rate proportional to itself. He also claimed that death is caused by
aging.
1
If we let µ(x) to represent man’s susceptibity to death, then µ(x)
represents man’s resistance to death. Thus,
1 1
D( ) = −h( ),
µ(x) µ(x)

9
where h is the constant of proportionality. This implies that

## where c = eh and the corresponding survival function is

x
s(x) = e−m(c −1)
,
B
where m = log c .

## 3. Makeham incorporates the accidental hazard rate cause of death,

which was not incorporated by Gompertz. Makeham defines the force
of mortality as
µ(x) = A + Bcx ,
where A captures the accidental hazard B and c are defined in the
same way they defined in Gompertz. The corresponding survival
function is x
s(x) = e−[Ax+m(c −1)] .

## 1.7 Chapter Exercises

Exercise 1.1. The following problems were lifted from the textbook “Ac-
tuarial Mathematics” (2nd edition) by Bowers, Gerber, Hickman, Jones and
Nesbitt. These problems are exercises from Chapter 3 found on pp. 84-91.
1. (Ex. 3.1) Complete the following table:

## s(x) FX (x) fX (x) µ(x)

π
tan x, 0 ≤ x ≤ 2

e−x , x > 0

1
1− 1+x , x ≥0

x
2. (Ex. 3.5) If s(x) = 1 − 100 , 0 ≤ x ≤ 100, calculate

## (a) µ(x); (c) fX (x);

(b) FX (x); (d) P r[10 < X < 40]

x
p
3. (Ex. 3.7) If s(x) = 1− 100 , 0 ≤ x ≤ 100, evaluate

10
(a) 17 p19 ; (d) µ(36);
(b) 15 q36 ;
(c) 15|13 q36 ; (e) E[T (36)]

X
4. (Ex. 3.8) Confirm that k| q0 = −∆s(k) and that k| q0 = 1.
k=0

## 6. (Ex. 3.10) If the survival times of 10 lives in a survivorship group

are independent with survival defined in Table 3.3.1, exhibit the pmf
of L(65) and the mean and variance of L(65).
x
7. (Ex. 3.11) If s(x) = 1 − 12 , 0 ≤ x ≤ 12, l0 = 9, and the survival
times are independent, then (3 D0 , 3 D3 , 3 D6 , 3 D9 ) is known to have a
multinomial distribution. Calculate
(a) the expected value of a each random varibale;
(b) the variance of each random variable;
(c) the coefficient of correlation between each pair of random vari-
ables.
8. (Ex. 3.15) Consider a random survivorship group consisting of two
subgroups: (1) the survivors of 1,600 persons joining at birth; (2)
the survivors of 540 persons joining at age 10. An excerpt from the
appropriate mortality table for both both subgroups follows:

x lx
0 40
10 39
70 26

## If Y1 and Y2 are the number of survivors to age 70 out of the subgroups

(1) and (2), respectively, estimate the number c, such that P r(Y1 +
Y2 > c) = 0.05. Assume the lives are independent and ignore half-unit
corrections.
9. (Ex 3.18) If the random variable T has pdf given by

## fT (t) = ce−ct , t ≥ 0, c > 0,

calculate

(a) E[T ];
(b) V ar[T ];
(c) the median of T ;
(d) the mode of the distribution of T

11
10. (Ex. 3.19) If
µx (t) = t, t ≥ 0,
calculate
(a) t px µx (t);
(b) eox
HINT: If Z ∼ N (0, 1), then
1 2
fZ (z) = √ e−z /2 .

## 11. (Ex. 3.21) Show that

(a) ∂x t px = − tpx [µ(x) − µx (t)];
d o o
(b) dx ex = ex µ(x) − 1;
(c) ∆ex = qx ex+1 − px
12. (Ex. 3.38) Using the lx column of Table 3.3.1, compute 1/2 p65 , for
each of the fractional age assumptions.

## 13. (Ex. 3.35) Consider the modification of De Moivre’s law given by

 x α
s(x) = 1 − , 0 ≤ x < ω, α > 0.
ω
Calculate

Acx
µ(x) = ,
1 + Bcx
for x > 0.

## (a) Find the survival function s(x);

(b) Show that the mode of X, the age-at-death random variable is

log(log c) − log A
x0 = .
log c
3 10
15. (Ex. 3.44) If µ(x) = 100−x − 250−x for 40 < x < 100, calculate

(a) 40 p50 ;

## (b) The mode of the distribution of X.

12
2 Life Insurances
2.1 Introduction
Insurance systems were established to reduce the adverse financial impact
of some type of random events, usually loss of life or an object of some
or of great value. In this chapter we will discuss some basic types of life
insurances. There will also be two different types of classification. One is
based on whether the benefit is paid at the moment of death of the insured
or at the end of the year of death of the insured. The other classification
is one whether the benefit size is fixed or if it varies depending on the time
of death of the insured.
Under these classification we will consider the following basic types of
insurance:
1. WHOLE LIFE insurance pays the benefit upon the death of the in-
sured any time in the future.

2. n-YEAR TERM insurance pays the benefit upon the death of the
insured if death occurs within n years after issue.
3. n-YEAR PURE ENDOWMENT pays the benefit at the end of n
years only if the insured survives to that time.

## 4. n-YEAR ENDOWMENT insurance pays the benefit upon the death

of the insured if death occurs within the n-year term or the end of n
years if the insured survives to that time.
5. m-YEAR DEFERRED WHOLE LIFE insurance pays the benefit
upon the death of the insured only if the insured dies at least m
years after issue.
6. m-YEAR DEFERRED, n-YEAR TEMPORARY insurance pays the
benefit upon the death of the insured only if death occurs at least m
years and at most m + n years after issue.

To denote the (net) present value of the insurance, that is, the (net)
present value of the benefit, we will use the random variable Z. Z is
dependent on several things. These are the size of the benefit, interest rate
and more importantly, the time of death of the insured, because this date
will tell us when the benefit is to be paid by the insurer to the beneficiaries
of the insured. Thus, for each type of insurance we will define the random
variable Z and then we will derive an expression for its expected value. The
expected value of Z, E[Z] is called the net single premium (NSP) of the
insurance.

## 2.2 Insurances Payable at the Moment of Death

The time of payment of benefit of the insurance is dependent on the length
of time between issue at age x and the death of (x). Thus, our insurance
model will be dependent on the random variable T = T (x). If we use bT to

13
denote the benefit function, and vT to denote our discount function, then
the random variable Z is defined as Z = bT vT .

## 1. Whole life insurance with benefit of 1 unit.

 T
v if T ≥ 0
vT =
0 otherwise.

and
bT = 1, T ≥ 0.
Thus,

vT

if T ≥ 0
Z=
0 otherwise.

Therefore, Z ∞
Āx = E[Z] = v t t px µx (t)dt.
0

## To get the variance of Z, we first find E[Z 2 ].

Z ∞ Z ∞ Z ∞
2 2t −2δt
E[Z ] = v t px µx (t)dt = e t px µx (t)dt = e(−2δ)t t px µx (t)dt.
0 0 0

## This shows that E[Z 2 ] at δt is equal to E[Z] at 2δt . Actually, the

j-th moment of the distribution of Z can be found by
Z ∞ Z ∞
E[Z j ] = (v t )j t px µx (t)dt = e(−jδ)t t px µx (t)dt.
0 0

Thus,
E[Z j ] at δt is equal to E[Z] at jδt .
This is called the rule of moments which holds generally for insur-
ances paying only a unit amount, and when the force of interest is
deterministic. We will use the notation 2 Āx for E[Z 2 ]. i.e., the actu-
arial present value for a whole insurance for a unit amount calculated
at 2δ.

## 2. n-year term insurance with benefit of 1 unit.

vT

if T ≤ n
vT =
0 otherwise.
and
bT = 1, T ≥ 0.
Thus,
vT

if T ≤ n
Z=
0 otherwise.

14
Therefore, Z n
Ā1x:n| = E[Z] = v t t px µx (t)dt.
0

## 3. n-year pure endowment of 1 unit.

vn

if T ≥ n
vT =
0 otherwise.
and

1 if T ≥ n
bT =
0 otherwise.
Thus,

vn

if T ≥ n
Z=
0 otherwise.

Therefore,
Z ∞ Z ∞
1
Ax:n| = E[Z] = v n t px µx (t)dt = v n t px µx (t)dt = v n [1−G(n)] = v n (1−n qx ) = v n n px .
n n

We can derive the E[Z] in another way. Since the size of the pay-
ment and the payment date are predetermined, the only element of
uncertainty is whether or not a claim will occur. Let

1 if (x) survives to age x + n
Y =
0 otherwise.

Then, Z = v n Y . Thus,

1
Āx:n| = E[Z] = E[v n Y ] = v n E[Y ] = v n n px .

Also,

1 1 2
− (Āx:n| ) .

## 4. n year endowment insurance with benefit of 1 unit.

vT

if T ≤ n
vT =
vn if T > n.
and
bT = 1, T ≥ 0.

15
Thus,
vT

if T ≤ n
Z=
vn if T > n.
Therefore,

Z n Z ∞
t
Āx:n| = E[Z] = v t px µx (t)dt + v n t px µx (t)dt = Ā1x:n| + Āx:n|
1
.
0 n

## Clearly, the NSP of the n-year endowment insurance is the sum of

the NSP’s of the n-pure endowment and n-year term insurance.
To get the variance we need to define the following random variables:

vT vT
  
if T ≤ n 0 if T ≤ n if T ≤ n
Z1 = ; Z2 = ; Z3 =
0 if T > n. vn if T > n. vn if T > n.

## Clearly, Z3 = Z1 + Z2 . Since Cov[Z1 , Z2 ] = E[Z1 Z2 ] − E[Z1 ]E[Z2 ]

and that E[Z1 Z2 ] = 0, for all t, then

## V ar[Z3 ] = V ar[Z1 ] + V ar[Z2 ] − 2Cov[Z1 , Z2 ]

= V ar[Z1 ] + V ar[Z2 ] − 2E[Z1 ]E[Z2 ]
= [ 2Ā1x:n| − (Ā1x:n| )2 ] + [ 2Āx:n|
1 1 2
− (Āx:n| ) ] − 2Ā1x:n| Āx:n|
1

2 1
= Āx:n| + 2Āx:n|
1
− [(Ā1x:n| )2 + 2Ā1x:n| Āx:n|
1 1 2
+ (Āx:n| ) ]
2 1
= Āx:n| + 2Āx:n|
1
− [Ā1x:n| + Āx:n|
1 2
]
2 1
= Āx:n| + 2Āx:n|
1
− (Āx:n| )2

## 5. m-year deferred whole life insurance with benefit of 1 unit.

vT = v T if T ≥ 0,

and 
0 if T ≤ m
bT =
1 if T > m.
Thus,

0 if T ≤ m
Z=
vT if T > m.

Therefore,
Z ∞
m| Āx = E[Z] = v t t px µx (t)dt.
m

## Obviously, Ā1x:m| + m| Āx = Āx .

16
Example 2.1. The pdf of T (x) is given by
 1
80 if 0 ≤ T ≤ 80
gT (t) =
0 elsewhere.
At the force of interest δ, calculate for Z
1. the NSP;
2. V ar[Z];
3. the 90th percentile, ξZ0.9 .
Example 2.2. Consider a 5 year deferred whole life insurance payable at
the moment of death of (x). The individual is subject to a constant force of
mortality µ = 0.04. For the distribution of the present value of the benefit
payment at δ = 0.10, calculate
1. the expectation;
2. the variance;
3. the median ξZ0.5 .
Example 2.3. Assume that each of 100 independent lives are
i.) aged x;
ii.) subject to the constant force of mortality µ = 0.04;
iii.) insured for the death benefit amount of 10 units, payable at the mo-
ment of death.
The benefit payments are to be withdrawn from an investment fund earning
δ = 0.06. Calculate the minimum amount at t = 0 so that the probability
is approximately 0.95 that sufficient funds will be on hand to withdraw the
benefit payment at the death of each individual.

## 2.3 Insurances Payable at the End of the Year of Death

The payments of the benefit are due at the end of the year of death. The
year is considered not be calendar years but instead is from birthday to
birthday of the insured. The benefit and discount functions are dependent
on the random variable K. Thus, we will denote the benefit function by
bK+1 and the discount function by vK+1 . Then, the random variable Z is
defined as Z = bK+1 vK+1 . We cosider some basic insurances payable at
the end of the year of death:
1. whole life insurance

vK+1 = v K+1 if K = 0, 1, 2, . . .
and
bK+1 = 1 if K = 0, 1, 2, . . .

17
Thus,

Z = v K+1 if K = 0, 1, 2, . . . .

Therefore,

X
Ax = E[Z] = v k+1 k px qx+k
k=0

and

X
2 2
V ar[Z] = Ax − (Ax ) , where Ax = 2
e−2δ(k+1) k px qx+k .
k=0

## 2. n-year term insurance


1 if K = 0, 1, 2, . . . , n − 1
bK+1 =
0 if K = n, n + 1, n + 2, . . . .
and
v K+1

if K = 0, 1, 2, . . . , n − 1
vK+1 =
0 if K = n, n + 1, n + 2, . . . .
Thus,

v K+1

if K = 0, 1, 2, . . . , n − 1
Z=
0 if K = n, n + 1, n + 2, . . . .

and

n−1
X
A1x:n | = E[Z] = v k+1 k px qx+k .
k=0

## 3. n-year endowment insurance

bK+1 = 1 if K = 0, 1, 2, . . .

and

v K+1

if K = 0, 1, 2, . . . , n − 1
vK+1 =
vn if K = n, n + 1, n + 2, . . . .
Thus,
v K+1

if K = 0, 1, 2, . . . , n − 1
Z=
vn if K = n, n + 1, n + 2, . . . .
Therefore,

18
n−1
X ∞
X n−1
X
Ax:n| = v k+1 k px qx+k + v k+1 k px qx+k = v k+1 k px qx+k +v n n px = A1x:n| +Ax:n|
1
,
k=0 k=n k=0

since

X ∞
X n−1
X
v k+1 k px qx+k = v n ( k px qx+k − k px qx+k ) = v n (1−n qx ) = v n n px .
k=n k=0 k=0

## 4. m-year deferred whole life insurance


0 if K = 0, 1, 2, . . . , m − 1
bK+1 =
1 if K = m, m + 1, m + 2, . . . .
and 
0 if K = 0, 1, 2, . . . , m − 1
vK+1 =
v k+1 if K = m, m + 1, m + 2, . . . .
Thus, 
0 if K = 0, 1, 2, . . . , m − 1
Z=
v k+1 if K = m, m + 1, m + 2, . . . .
Therefore,

X
m| Ax = E[Z] = v k+1 k px qx+k .
k=m

## 2.4 Relation of Z and T

Consider a whole life insurance with a unit benefit. We know that {Z ≤
log z
z} = φ, whenever z < 0. If 0 < z < 1, then {Z ≤ z} = {T ≥ log v } and if
z ≥ 1, {Z ≤ z} = Ω. Thus, the cdf of Z can be expressed in terms of the
cdf of T in the following manner:

 0 if z ≤ 0
log z
FZ (z) = 1 − FT ( log v ) if 0 < z < 1
1 z ≥ 1.

## It follows then that the pdf of Z in terms of the pdf of T as

 1 log z
( δz )fT ( log v) if 0 < z < 1
fZ (z) =
0 elsewhere.
Example 2.4. Given the pdf of T as:
 1
80 if 0 < t < 80
fT (t) =
0 elsewhere.
Find the pdf and cdf of Z.

19
We now consider an m year deferred insurances payable at the moment
of death and at the end of the year of death. We note that for an m year
deferred whole life insurance, although T is continuous, Z is mixed with
pmf at 0 because {Z = 0} corresponds to {T ≤ m}. Thus,

## P r[Z = 0] = P r[T ≤ m] = FT (m).

Then, for 0 < z < v m ,

FZ (z) = P r[Z ≤ z]
= P r[Z = 0] + P r[0 < Z ≤ z]
= P r[T ≤ m] + P r[0 < v T ≤ z]
log z
= P r[T ≤ m] + P r[T ≥ ]
log v
log z
= FT (m) + 1 − FT ( )
log m

## For z ≥ v m , FZ (z) = 1. Therefore, the cdf of Z is

 FT (m) if z = 0
log z
FZ (z) = FT (m) + 1 − FT ( log v ) 0 < z < vm .
1 z ≥ vm

## Example 2.5. Consider a 5-year deferred whole life insurance payable

at the moment of death. If the constant force of mortality is used with
µ = 0.04 and suppose δ = 0.10, then find the pdf of Z.

## 2.5 Varying Benefit Insurance

We consider an insurance with a varying benefit and payable at the moment
of death.

## 1. An annually increasing whole life insurance providing a payment of

1 at the moment of death during the first year; 2 at the moment of
death during the second year; 3 at the moment of death during the
third year and so on.
Then, when T ≥ 0,

bT = [T + 1], vT = v T .

So,
Z = [T + 1]v T ,
where T ≥ 0. Therefore,
Z ∞
(I Ā)x = E[Z] = [t + 1]v t t px µx (t)dt.
0

20
1
2. An mth ly increasing whole life insurance providing a payment of m
th 2
at the moment of death during the first m of the year; m at the mo-
ment of death during the second mth of a year, and so on, increasing
1
by m at mth ly intervals thoughout the term of the insurance. Then,
when T > 0,
[T m + 1]
bT = , vT = v T .
m
So, for T ≥ 0,
v T [T m + 1]
Z= .
m
Therefore,
Z ∞ t
v [tm + 1]
(I (m) Ā)x = E[Z] = t px µx (t)dt.
0 m

## 3. If m → ∞ in (I (m) Ā)x , then we have a continuously increasing whole

life insurance. Thus,
Z ∞
(I¯Ā)x = lim (I (m) Ā)x = tv t t px µx (t)dt.
m→∞ 0

## This follows from

bT = T, vT = v T ,
whenever T ≥ 0. Thus,
Z = T vT ,
whever T ≥ 0.

## 4. A decreasing n-year term insurance provides a payment of n at the

moment of death during the first year, n − 1 at the moment of death
during the second year, and so on until the coverage is terminated at
the end of the nth year. Thus,

n − [T ] if T < n
bT = ,
0 if T ≥ n

vT = v T , T > 0.
Thus,
V T (n − [T ])

if T < n
Z= .
0 of T ≥ n
Therefore,
Z n
(DĀ)1x:n| = E[Z] = v t (n − [t])t px µx (t)dt.
0

## We now consider an insurance with varying benefit and payable at the

end of the year of death.

21
1. An increasing whole life insurance paying K + 1 units at the end of
K + 1 years provided the insured dies after K complete years. Then,
for K = 0, 1, 2, . . .

## bK=1 = K + 1, vK+1 = v K+1 .

Thus, whenever K = 0, 1, 2, . . .

Z = (K + 1)v K+1 ,

and

X
(IA)x = E[Z] = (k + 1)v k+1 k px qx+k .
k=0

## 2. An increasing n-year term insurance providing a payment of 1 at the

end of the first year if death occurs during the first year; a payment
of 2 at the end of the second year if death occurs during the second
year, and so on, a payment of n at the end of the nth year if death
occurs during the nth year and then the policy terminates at the end
of the nth year. Thus,

K +1 if K = 0, 1, 2, . . . , n − 1
bK+1 = ,
0 of K = n, n + 1, n + 2, . . .

and
vK+1 = v K+1 , K = 0, 1, 2, . . . .
Thus,

(K + 1)v K+1

if K = 0, 1, 2, . . . , n − 1
Z= .
0 of K = n, n + 1, n + 1, . . .

Therefore,
n−1
X
(IA)1x:n| = E[Z] = (k + 1)v k+1 k px qx+k .
k=0

## 3. A decreasing n-year term insurance provides a payment of n at the

end of the first year if death occurs during the first year; a payment of
n − 1 at the end of the second year if death occurs during the second
year, and so on until a payment of 1 at the end of the nth year if
death occurs during the nth year, then the policy terminates at the
end of the nth year. Thus

n−K if K = 0, 1, 2, . . . , n − 1
bK+1 = ,
0 of K = n, n + 1, n + 2, . . .
and
vK+1 = v K+1 , K = 0, 1, 2, . . . .

22
Thus,
(n − K)v K+1

if K = 0, 1, 2, . . . , n − 1
Z= .
0 of K = n, n + 1, n + 1, . . .
Therefore,

n−1
X
(DA)1x:n| = E[Z] = (n − k)v k+1 k px qx+k .
k=0

## 2.6 Relationship between Insurances payable at the

moment of death and at the end of the year of
death
Consider an n-year term insurance, then

Z n
Ā1x:n| = v t t px µx (t)dt
0
n−1
X Z k+1
= v t t px µx (t)dt
k=0 k
n−1
XZ 1
= v k+s k+s px µx+k (s)ds since t = k + s
k=0 0
n−1
X Z 1
= v k+1 k px v s−1 s px+k µx+k (s)ds
k=0 0
n−1
X Z 1
= v k+1 k px qx+k v s−1 ds since under UDD s px+k µx+k (s) = qx+k
k=0 0
n−1
X Z 1 Z 1
k+1 s−1
= v k px qx+k s̄1| since v dt = (1 + i) v s ds = (1 + i)ā1| = s̄1|
k=0 0 0
1
(1 + i)t 1
Z
i i
= A since s̄1| = (1 + i)t dt = |0 =
δ x:n| 0 log(1 + i)t δ

Moreover,
i i
Āx = lim Ā1x:n| = lim A = Ax .
n→∞ n→∞ δ x:n| δ
Alternatively, we recall that T = K + S, where S represents the frac-
tional part of the year lived in the year of death. We know that under
UDD, K and S are independent then K + 1 and 1 − S are also indepen-
dent. Moreover, S is uniformly distributed in (0, 1). This implies that 1−S
is also uniformly distributed in (0, 1). Thus,

i
Āx = E[v T ] = E[v K+1 (1 + i)1−S ] = E[v K+1 ]E[(1 + i)1−s ] = Ax .
δ

23
This is true because 1 − S is uniformly distributed in (0, 1), then
Z 1
i
E[(1 + i)1−S ] = (1 + i)1−s ds = .
0 δ
Consider an n-year term increasing insurance payable at the moment of
death. The present value random variable is

[T + 1]v T

if T < n
Z= .
0 of T ≥ n
But, [T + 1] = K + 1 and since T = K + S, then

## (K + 1)v K+1 v S−1


if T < n
Z= .
0 of T ≥ n
Let W be the present value random variable for the annually increasing
n-year term insurance payable at the end of the year of death, so

(K + 1)v K+1

if K = 0, 1, 2, . . . , n − 1
W = .
0 of K = n, n + 1, n + 1, . . .

Then,
Z = W v S−1 = W (1 + i)1−S .
Since W is a function of K + 1 and K + 1 and 1 − S are independent under
UDD, we have
i
E[Z] = E[W (1 + i)1−S ] = E[W ]E[(1 + i)1−S ] = (IA)1x:n| .
δ
Example 2.6. Calculate the NSP and variance for a 10000, 30-year en-
dowment insurance providing the death benefit at the moment of death for
a male aged 35 at issue policy. Use the illustrative life table, the UDD
assumptions and i = 0.06.
Example 2.7. Calculate for a life aged 50, the APV for an annually de-
creasing 5-year term insurance paying 5000 at the moment of death in the
first year, 4000 in the second year and so on. Use the illustrative life table,
the UDD assumption and i = 0.06.

3 LIFE ANNUITIES
In the theory of interest we discussed annuities. We said that an annuity
is a sequence of periodic payments. To determine the present value as well
as the accumulated value of an annuity only three things were considered,
the size of the periodic payments, the term of the annuity and the interest
rate used. Moreover the term of the annuity is fixed or pre-defined. In this
chapter we will consider another type of annuity - the life annuity. Since
this is an annuity, it will be a sequence of periodic payments. However, the
term of payment is also contingent on the survival of the annuitant. This
means that the payments are made for as long as the annuitant is alive and

24
the payments terminates upon the death of the annuitant. Since the time of
death of an individual is not pre-determined, the term of the life annuity is
uncertain. Thus, to determine the present value of the annuity, we consider
the interest rate as well as the time until death of the annuitant.
There are two methods in finding the present value of a life annuity.
These are the aggregate payment technique and the current payment tech-
nique. The steps in finding the present value using these techniques are:
1. Aggregate payment technique
(a) Record interest only present value of all payments to be made
by the annuity if death occurs at time t;
(b) Multiply the present value, found in (a.) by the probability or
the pdf of death at time t;
(c) Add/Integrate over all times of death t.
2. Current payment technique

## (a) Record the amount of the payment due at time t;

(b) Determine the APV of the payment due at time t;
(c) Add/Integrate these APV’s for all payments.

## 3.1 Types of Life Annuities

The types of life annuities that we will discussed are the following:
1. Whole life annuity - provides a payment of 1 per year for as long the
annuitant (x) is alive and the payment terminates upon the death of
the annuitant.

## 2. n-year temporary life annuity - provides a payment of 1 per year for

as long as the annuitant (x) is alive within the given n-year term.
The payment terminates upon the death of the annuitant if death
occurs within the n-year term or at the end of n-years if the annuitant
survives to that time.

## 3. m-year deferred whole life annuity provides a payment of 1 per year

to commence m years after the start of the annuity’s term and will
continue for as long as the annuitant is alive.
4. m-year deferred, n-year temporary life annuity - provides a payment
of 1 per year, m years after the start of the term of the annuity.
The payments continue for as long as the annuitant is alive within
n-year paying period. The payments terminates upon the death of
the annuitant, if death occurs with the first m+n years after the start
of the annuity’s term or at the end of m + n years, if the annuitant
survives to that time.

25
As it was with Theory of Interest, there is another classification of life
annuities depending on the time when the annuity payment is made. We
have the continuous life annuity wherein the annual payments is payable
continuously within the year. We also have the life annuity-due wherein
the annual payments are made at the beginning of each year; and the life
annuity-immediate, wherein the annual payments are made at the end of
each year.
In the aggregate payment technique, we will denote by Y , the random
variable representing the present value of all payments considering interest
alone. Thus, Y is a function of T , when the annuity payments are made
continuous and is a function of K when the annuity payments are made
either at the beginning or at the end of each year.

## 3.2 Continuous Life Annuity

Consider a continuous whole life annuity. This provides an annual payment
of 1 payable continuous during the year. Under the aggregate payment
technique, we have
Y = ā T | T > 0.
Then, the expected value of Y , which is denoted by āx is
Z ∞
āx = E[Y ] = ā t| t px µx (t)dt. (1)
0
Under the current payment technique, the actuarial present value of the
payment of 1 made at time t is v t t px , thus āx is
Z ∞
āx = v t t px dt. (2)
0
We can show that (1) and (2) are equivalent by integrating by parts 1.
To do this, we let
1 − vt
u = āt| = and dv = t px µx (t)dt,
δ
then
1
du = − v t log vdt = v t dt and v = −t px .
δ
Thus, Z ∞ Z ∞
∞ t
āx = āt| (−t px )|0 + v t px dt = v t t px dt.
0 0
We now find the cdf of Y , when Y = āT | .

## FY (y) = P r[Y ≤ y] = P r[āT | ≤ y] = P r[1 − v T ≤ δy]

log(1 − δy)
= P r[v T ≥ 1 − δy] = P r[T ≤ − ]
δ
log(1 − δy) 1
= FT [− ] for 0<y<
δ δ

26
Then, the pdf of Y is

d d log(1 − δy)
fY (y) = FY (y) = FT [− ]
dy dy δ
1 log(1 − δy) 1
= fT [− ] for 0<y< .
1 − δy δ δ

We can see that the cdf and pdf of Y are dependent on the cdf and the
pdf of T . To show the relationship of Āx and āx , we have
Z ∞
Āx = v t t px µx (t)dt.
0

## If we integrate this by parts and let u = v t and dv = t px µx (t)dt, then we

have du = −δv t dt and v = −t px . Thus,
Z ∞
Āx = −v t t px |∞
0 − δ v t t px dt = 1 − δāx .
0

## We can also show this relationship by considering that

1 − vT 1−Z
Y = āT | = = ,
δ δ
where Z = v T , for T > 0. Then,

1 − E[Z] 1 − Āx
āx = E[Y ] = = .
δ δ
Furthermore,
1−Z 1 1
V ar[Y ] = V ar[āx ] = V ar[ ] = 2 V ar[v T ] = 2 [ 2Āx − (Āx )2 ].
δ δ δ
Consider now an n-year temporary life annuity. Then under the aggre-
gate payment technique, the random variable Y is defined as
(
āT | if T < n
Y = .
ān| of T ≥ n

Thus,
Z n Z ∞
āx:n| = E[Y ] = āt| t px µx (t) + ān| t px µx (t)
0 n
Z n
= āt| t px µx (t) + ān| t px ,
0

since Z ∞
t px µx (t)dt = t qx |∞
n = 1 − n qx = n px .
n

27
Under the current payment technique, we have
Z n
āx:n| = v t t px dt.
0
To show the relationship between Āx:n| and āx:n| , we have
(
āT | if T < n
Y = .
ān| of T ≥ n
is equivalent to
vT

1−Z if T < n
Y = where Z= .
δ vn if T ≥ n
Thus,

1−Z 1 − Āx:n|
āx:n| = E[Y ] = E[ ]= .
δ δ
Also,
1−Z 1 1
V ar[Y ] = V ar[ ] = 2 V ar[Z] = 2 [ 2Āx:n| − (Āx:n| )2 ].
δ δ δ
We note that the actuarial accumulated value value at the end of the
term of an n-year temporary life annuity of 1 per year payable continuously
while (x) survives is denoted by s̄x:n| . Thus,
Z n t Z n Z n
1 v t px t Ex 1
s̄x:n| = āx:n| = dt = dt = dt.
n Ex 0 n Ex 0 n Ex 0 n−t Ex+t
We now consider the m-year deferred whole life annuity. Under the
aggregate payment technique, we have

0 if T < n
Y =
v n āT −n| if T ≥ n
or equivalently, 
0 if T < n
Y =
āT | − ān| if T ≥ n
Thus,
Z ∞
n| āx = E[Y ] = (āt| − ān| )t px µx (t)dt
n
Z ∞
= v n āt−n| t px µx (t)dt
n
Z ∞
n
= v ās| n+s px µx+n (s)ds let t − n = s
0
Z ∞
= v n n px ās| s px+n µx+n (s)ds
0
= n Ex āx+n

28
Under the current payment technique,
Z ∞
n| āx = v t t px dt.
n

Moreover,
Z ∞ Z ∞
v t t px dt = v n+s n+s px ds let t=n+s
n 0
Z ∞
n
= v n px v s s px+n ds
0
= n Ex āx+n .

Also,
Z ∞ Z ∞ Z n
t t
n| āx = v t px dt = v t px dt − v t t px dt
n 0 0

1 − Āx 1 − Āx:n|
= āx − āx:n| = −
δ δ
Āx:n| − Āx
=
δ

1. ∂x āx ;

2. ∂n n| āx

## Example 3.2. Under the constant force of mortality assumption, µ(x) = µ

and δt = δ. Evaluate
1. āx = E[āT | ];

2. V ar[āT | ];

## 3.3 Discrete Life Annuities

3.3.1 Life Annuity Due
Consider a whole life annuity due of 1 per year. Under the aggregate
payment technique, we have

Y = äK+1| for K = 0, 1, 2, . . . .
Thus,

X
äx = E[Y ] = E[ äK+1| ] = äK+1| k px qx+k .
0

29
1−v K+1
Also, since äK+1| = d , we have

1 − v K+1 1 − Ax
äx = E[ äK+1| ] = E[ ]= .
d d
Moreover,
1 − v K+1 1 1
V ar[Y ] = V ar[äK+1| ] = V ar[ ] = 2 V ar[v K=1 ] = 2 [ 2Ax −(Ax )2 ].
d d d
Under the current payment technique,

X ∞
X
äx = v k k px = k Ex .
k=0 k=0

For the n-year temporary life annuity due of 1 per year, we have under
the aggregate payment technique

äK+1| if K = 0, 1, 2, . . . n − 1
Y =
än| if K = n, n + 1, . . .
Thus,
n−1
X ∞
X
äx:n| = E[Y ] = äk+1| k px qx+k + äk+1| k px qx+k
k=0 k=n
n−1
X
= äk+1| k px qx+k + än| n px ,
k=0

## Under the current payment technique,

n−1
X
äx:n| = v k k px .
k=0

## The random variable defined above is equivalent to

v K+1

1−Z if K = 0, 1, 2, . . . n − 1
Y = where Y = .
d vn if K = n, n + 1, . . .
Then,
1−Z 1 − Ax:n|
äx:n| = E[Y ] = E[ ]= ,
d d
and
1−Z 1 1
V ar[Y ] = V ar[ ] = 2 V ar[Z] = 2 [ 2Ax:n| − (Ax:n| )2 ].
d d d
We now consider an n-year deferred whole life annuity-due of 1. Under
the aggregate payment technique,

0 if K = 0, 1, 2, . . . n − 1
Y =
v n äK−n| if K = n, n + 1, . . . .

30
Thus,

X
n| äx = E[Y ] = v n äk−n| k px qx+k .
k=n

## Under the current payment technique,

X
n| äx = v k k px .
k=n

## It also follows that

X ∞
X n
X
n| äx = v k k px qx+k = v k k px qx+k − v k k px qx+k = äx − äx:n| .
k=n k=0 k=0

Furthermore,

1 − Ax 1 − Ax:n| Ax:n| − Ax
n| äx = äx − äx:n| = − = .
d d d
Finally,

X ∞
X
n| äx = v k k px qx+k = v n n px v k k px+n = n Ex äx+n .
k=n k=0

## 3.3.2 Life Annuity-Immediate

For a whole life annuity immediate of 1 per year, the actuarial present value
is
X∞
ax = v k k px .
k=1

## Clearly, we can see that

ax = äx + 1.
Under the aggregate payment technique,

Y = aK| where K = 1, 2, 3, . . . .

It follows that
1 − vK 1 − (1 + i)v K+1 1 − (1 + i)Ax
ax = E[Y ] = E[aK| ] = E[ ] = E[ ]= .
i i i
For the n-year temporary life annuity immediate of 1 per year, the apv
is
n
X
ax:n| = v k k px = äx:n| − 1 + n Ex .
k=1

For an n-year deferred whole life annuity immediate of 1 per year, the
apv is
X∞
a
n| x = v k k px .
k=n+1

31
It is very easy to show that

## Let us consider some other identities involving the actuarial present

values of life annuity due and life annuity immediate and the net single
premiums of the corresponding life insurance. We have,

## Ax = E[v K+1 ] = E[aK+1| − aK| ] = E[väK+1| − aK| ] = vE[äK+1| ] − E[aK| ]

Therefore,
Ax = väx − ax .
Analogously, it can be shown that
1
Ax:n| = väx:n| − ax:n| .

Also,
1
Ax:n| = Ax:n| + n Ex = väx:n| − ax:n| + n Ex = väx:n| − ax:n−1|

## 3.4 Life Annuities with mth ly Payments

1
Consider a whole life annuity of 1 per year payable in installments of m at
the beginning of each mth of a year while (x) survives. Let J be a random
variable representing the number of complete mth ’s of a year lived in the
year of death. Thus,
J = [ (T − K)m ].
1
We note that there are m payments of m for each complete year lived and
1
J + 1 payments of m in the year of death. Thus, under the aggregate
payment technique,
mK+J J+1
X 1 j/m (m) 1 − v K+ m
Y = v = ä J+1 = .
j=0
m K+ m | d(m)

Then,
J+1
1 − v K+ m 1 − A(m)
ä(m)
x = E[Y ] = E[ (m)
]= .
d d(m)
Under current payment technique, we have

1 X h
ä(m)
x = vm h px .
m m
h=0

(m)
We show a relationship between äx and äx . We know that

## 1 = d(m) ä(m) + A(m)

x and 1 = däx + Ax .

## This implies that

d(m) ä(m)
x + A(m)
x = däx + Ax ,

32
or equivalently,
d 1
ä(m)
x = äx − (A(m)
x − Ax ).
d(m) d(m)
(m) i (m) (m)
Applying UDD, Ax = A
i(m) x
=s Ax and since d(m) ä = d, then,
1| 1|

## (m) (m) (m) (m)

s − 1 ä d a¨x − (s − 1)(1 − däx )
(m) 1| 1| 1|
ä(m)
x = ä äx − Ax =
1| d(m) d(m)
(m) (m) (m)
1−s + ds äx d s −1
1| 1| (m) 1|
= = s äx − = α(m)äx − β(m)
d(m) d(m) 1| d(m)

(m)
s −1
d (m) id 1| i−i(m)
where α(m) = d(m)
s = i(m) d(m)
and β(m) = d(m) = i(m) d(m)
.
1|
(m)
A simpler relationship is äx = äx − m−12m .

Example 3.3. On the basis of the illustrative life table with interest at
i = 0.06, calculate the APV of a whole life annuity due of 1000 per month
for a retiree aged 65.

## 3.5 Chapter Exercise

Exercise 3.1. The following problems were lifted from the textbook “Ac-
tuarial Mathematics” (2nd edition) by Bowers, Gerber, Hickman, Jones
and Nesbitt. These problems are exercises from Chapter 4 found on pp.
126-132.

## 1. (Ex. 4.1) If µ(x) = µ > 0, for all x > 0, show that

µ
Āx = .
µ+δ

1
2. (Ex. 4.2) Let µ(x) = 1+x , ∀x > 0.

## (a) Integrate by parts to show that

Z ∞
1+x
Āx = 1 − δ e−δt dt.
0 1 + x+t

d
(b) Use (a) to show that dx Āx < 0, ∀x > 0.

dĀx
= −v(I¯Ā)x .
di

## 4. (Ex. 4.6) Assume mortality is described by lx = 100−x, 0 ≤ x ≤ 100

and that δ = 0.05.

33
(a) Calculate Ā140:25| ;
(b) Determine the APV for a 25-year term insurance with benefit
amount for death at time t, bt = e0.05t , for (40) at policy issue.
5. (Ex. 4.9)

## (a) Show that Āx is the MGF of T , evaluated at −δ.

(b) Show that if T has a gamma distribution, with parameters α
and β, then
 −α
δ
Āx = 1 + .
β
6. (Ex. 4.10) Given bt = t, µx (t) = µ and δt = δ, derive expressions
for

## (a) (I¯Ā)x = E[bT v T ]; (b) V ar[bT v T ].

7. (Ex. 4.11) The r. v. Z, is the PV r.v. for the whole life insurance
of unit amount payable at the moment of death and issued to (x). If
δ = 0.05 and µx (t) = 0.01,

## (a) display the formula for the pdf of Z;

(b) graph the pdf of Z;
(c) calculate Āx and V ar[Z].
8. (Ex. 4.14) If lx = 100 − x, 0 ≤ x ≤ 100 and i = 0.05, evaluate

## 9. (Ex. 4.16) If Ax = 0.25, Ax+20 = 0.40, and Ax:20| = 0.55, calculate

1
(a) Ax:20| ; (b) A1x:20|

## 10. (Ex. 4.17)

(a) Describe the benefit of the insurance with APV given by the
symbol (IA)x:m| .
(b) Express the APV of (a) in terms of the symbols in Tables 4.2.1
and 4.3.1.
11. (Ex. 4.20) Show that under the constant force of mortality assump-
tion between integral ages

X i + qx+k
Āx = v k+1 k px µx (k) ,
δ + µx (k)
k=0

## where µx (k) = − log px+k .

34
12. (Ex. 4.21)
(a) Show that Z ∞
Āx = v t t px µx (t)dt
0
can be rewritten as
Z ∞
1
Āx = x
v y y p0 µy dy, x ≥ 0.
x p0 v x

## (b) Differentiate the formula in (a) to establish

d
Āx = Āx (µx + δ) − µx , x ≥ 0.
dx
(c) Use the same technique to show
d 1
Ā = Ā1x:n| (µx + δ) + Āx:n|
1
µx+n − µx x ≥ 0.
dx x:n|
13. (Ex. 4.28) Assume that T (x) has a pdf given by
2 2
fT (t) = √ e−t /200 , t>0
10 2π
and δ = 0.05. Show that
(a) Āx = 2e0.125 [1 − Φ(0.5)] = 0.6992;
(b) 2 Āx = 2e0.5 [1 − Φ(1)] = 0.5232;
(c) V ar[Z] = 0.0343, where Z = v T ;
(d) ξZ0.5 = 0.7076

4.1 Introduction
In practice life insurance is purchased by a life annuity of contract(gross)
premiums. These contract premiums provide not only for the benefit to
paid but also for the expenses in initiating and maintaining the insurance
and margins for profits for the insurance company. In contrast, benefit
premiums provide only for the benefit. In this chapter we will discuss
benefit premiums. The benefit premiums we will consider are those which
satisfy the equivalence principle. This principle satisfies,

E[L] = 0,

where L is called the insurer’s loss defined as the random variable of the
present value of the benefits to be paid by the insurer less the present value
of the benefit premiums to be paid by the insured. In other words,

## E[PV of benefits] = E[PV of benefit premiums].

35
5 Fully Continuous Premiums
In general the random variable L is defined as
L = Z − P̄ Y,
where Z is the present value of the benefit as defined in Chapter 2, Y is the
present value of the life annuity as defined in Chapter 3 and P̄ is the annual
premium payable continuously. If the equivalence principle is applied then,
E[L] = E[Z − P̄ Y ] = E[Z] − P̄ E[Y ] = 0.
Thus,
E[Z]
.
P̄ =
E[Y ]
Consider a fully continuous level annual benefit premium for a unit
amount whole life insurance payable at the moment of death of (x), then,
L = v T − P̄ āT | where T > 0.

## Then, using the equivalence principle we have the benefit premium,

E[v T ] Āx
P̄ (Āx ) = P̄ = = .
E[āT | ] āx

## To find the variance of L, we note that since E[L] = 0, then V ar[L] =

E[L2 ].

1 − vT
V ar[L] = V ar[v T − P̄ āT | ] = V ar[v T − P̄ ]
δ
P̄ P̄ P̄
= V ar[v T (1 + ) − ] = (1 + )2 V ar[v T ]
δ δ δ
P̄ 2 2
= (1 + ) [ Āx − (Āx ) ]
δ

Āx
Since P̄ = āx , then

## P̄ 2 Āx 2 δāx + Āx 2 1 2

(1 + ) = (1 + ) =( ) =( ) .
δ δāx δāx δāx
Therefore,
2
Āx − (Āx )
V ar[L] = .
(δāx )2
We now find an expression for the cdf of L in terms of the cdf of T .
1 − vT
FL (u) = P r[L ≤ u] = P r[v t − P̄ ( ) ≤ u]
δ
δu + P̄ 1 δu + P̄
= P r[v T ≤ ] = P r[T ≥ − log( )]
δ + P̄ δ δ + P̄
1 δu + P̄ P̄
= 1 − FT (− log( )) where u > −
δ δ + P̄ δ

36
Then, the pdf of L is

d 1 δu + P̄ 1
fL (u) = FL (u) = {fT (− log( ))}( ),
du δ δ + P̄ δu + P̄

## Loss Components Premium

Plan bT v T P̄ Y , where Y is P̄
Whole Life 1v T āT | , T ≥ 0 P̄ (Āx ) = Āx
āx
Ā1x:n|
n-year 1v T āT | , T ≤ n P̄ (Ā1x:n| ) = āx:n|
term 0 ān| , T > n
Āx:n|
n-year 1v T āT | , T ≤ n P̄ (Āx:n| ) = āx:n|
endowment 1v n ān| , T > n
T Āx
h-payment 1v āT | , T ≤ h h P̄ (Āx ) = āx:h|
whole life 1v T āh| , T > h
h-payment 1v T āT | , T ≤ h
Āx:n|
n-year 1v T āh| , h < T ≤ n h P̄ (Āx:n| ) = āx:h|
endowment 1v n āh| , T > n

## Example 5.1. Under the constant force of mortality µ)x(t) = µ. Given

the force of interest δ, find an expression for P̄ (Āx ).
Example 5.2. Show that the variance of the loss L, associated with an
n-year endowment insurance can be expressed as:
2
Āx:n| − (Āx:n| )2
V ar(L) = .
(δāx:n| )2

## Example 5.3. Derive the following identities:

1−δāx 1−δ Āx
1. P̄ (Āx ) = āx = Āx
;
1−δāx:n| 1−δ Āx:n|
2. P̄ (Āx:n| ) = āx:n| = Āx:n|

## 6 Fully Discrete Premiums

To find the benefit discrete premium P , we follow the same procedure as
in finding P̄ . Consider level annual premiums payable at the beginning of
each year for a unit whole life insurance payable at the end of the year of
death. Then, for K = 0, 1, 2, . . ..

## Z = v K+1 and Y = äK+1| .

37
Then,
L = Z − P Y = v K+1 − P äK+1| .
This implies that using the equivalence principle
Ax
Px = P = .
äx
It can be shown easily that
2
Ax − (Ax )2
V ar[L] = .
(däx )2
0.04
Example 6.1. Suppose k| qx = c(0.96)k+1 , where k = 0, 1, 2 . . ., c = 0.96
and i = 0.06, find Px .
Example 6.2. Consider a 10,000 fully discrete whole life insurance. Let π
denote an annual premium for this policy and L(π) denote the loss-at-issue
random variable for one such policy on the basis of the Illustrative Life
Table, 6% interest and issue age 35.
1. Determine the premium πa , such that the loss of L(πa ) has mean 0.
Calculate the variance of L(πa ).
2. Approximate the smallest nonnegative premium πb , such that the
probability is less than 0.5 that the loss L(πb ) is positive. Find the
variance of L(πb ).
3. Determine the premium πc , such that the probability of a positive
total loss on 100 such independent policies is 0.05 by the normal
approximation.

## 6.1 True m-thly Payment Premiums

Most of the time, the premium paid for an insurance policy is made several
times in a year, instead of once a year. The premium paid m times per
year, with no adjustment in the death benefit is called the true fractional
(m)
premiums. The notations Px and P (m) (Āx ) represents the true level
annual benefit premium, payable in mthly installments, for a a unit whole
life insurance payable at the end of the year of death and at the moment
of death respectively.
Summary of Benefit Payments

## Plan At End of Year At Moment of Death

(m)
Whole Life Px = A(m) x
P (m) (Āx ) = Ā(m)
x
äx äx
1(m) Ā1x:n| Ā1x:n|
n-year term P = (m) P (m) (Ā1x:n| ) = (m)
x:n| ä ä
x:n| x:n|
(m) Ax:n| Āx:n|
n-year endowment P = (m) P (m) (Āx:n| ) = (m)
x:n| ä ä
x:n| x:n|
(m) Āx (m) Āx
h-payment, whole life h Px = (m) hP (Āx ) = (m)
ä ä
x:h| x:h|
(m) Ax:n| (m) Āx:n|
h-payment, n-year endowment hP = (m) hP (Āx:n| ) = (m)
x:n| ä ä
x:h| x:h|

38
We note that the actual amount of each fractional premium is P (m) /m.
The payment term h is in years. Furthermore, we express the fractional
premium as a multiple of the corresponding annual premium. Thus, for
(m)
instance we express h P as
x:n|
 
(m)
äx:h|
hP = h Px:n|  .
x:n| (m)

x:h|

Example 6.3. Calculate the level annual benefit premium payable in semi-
annual installments for a 10,000, 20-year endowment insurance with pro-
ceeds paid at the end of the policy year of death (discrete) issued to (50),
on the basis of the Illustrative Life Table with i = 0.06.

## 6.2 Chapter Exerices

Exercise 6.1. The following problems were lifted from the textbook “Ac-
tuarial Mathematics” (2nd edition) by Bowers, Gerber, Hickman, Jones
and Nesbitt. These problems are exercises from Chapter 5 found on pp.
158-166.
1. (Ex. 5.1) Using UDD in each year of age and the Illustrative Life
Table with i = 0.06, calculate
(a) ā20 , ā50 , ā80 ;
(b) V ar[āT | ], for x = 20, 50, 80.

2. (Ex. 5.2) Using the values obtained in Exercise 5.1, calculate the
standard deviation and the coefficient of variation σµ , of the following
present value random variables.
(a) Individual annuities issued at ages 20, 50, 80 with life incomes
of 1000 per year payable continuously;
(b) A group of 100 annuities, each issued at age 50, with life incomes
of 1000 per year payable continuously.
3. (Ex. 5.6) Assume µx (t) = µ and δt = δ, t ≥ 0. Given the following
definition for Y , display its distribution function.
(
(a) Y = āT | , T ≥ 0 0 0≤T <n
(c) Y =
āT | − ān| T ≥ n
( (
āT | 0 ≤ T < n ān| 0 ≤ T < n
(b) Y = (d) Y =
ān| T ≥ n āT | T ≥ n

## 4. (Ex. 5.11) Show that

V ar[v K+1 ]
V ar[aK| ] = V ar[äK+1| ] = .
d2
5. (Ex. 5.12) Prove the following identities.

39
Ax:n| −Ax
(a) ax:n| = 1 Ex äx+1:n| (b) n| ax = − n Ex
d

## 6. (Ex. 5.13) Show that

Ax:n| = väx:n| − ax:n−1| .

## (m) 1 i(m) (m)

a(m)
x =s ax + [(1 + i)ax − (1 + )Ax ],
1| i(m) m
and that under UDD, this becomes
(m)
1 − ä
(m) 1|
a(m)
x =s ax + (1 + i) Ax .
1| i(m)
8. (Ex. 5.19) Show that the annuity-immediate analogue of (5.4.7) is
(m)
1 − (1 + i(m) /m)Ax (m) (m) (m)
a(m)
x = =a − ä Ax ,
i(m) ∞| ∞|

## and that under UDD, this becomes

(m)
1 − ä
1|
a(m)
x = α(m)ax + .
i(m)
9. (Ex. 5.22)
(m)
(a) Develop a formula for s̈ in terms of s̈25:40| .
25:40|
(b) On the basis of the Illustrative Life Table, with i = 0.06, calcu-
late the values of
(12) (12)
i. ä ; ii. s̈
25:40| 25:40|

## 10. (Ex. 5.26) Verify the formula

¯
δ(Iā) + T v T = āT | ,
T|

## where T represents the future lifetime of (x). Use it to prove

¯ x + (I¯Ā)x = āx ,
δ(Iā)
¯ x is the APV of a life annuity to (x) under which payments
where (Iā)
are being made continuously at the rate of t per annum at time t.
11. (Ex. 5.47) Show that
d
äx = −v(Ia)x ,
di
where

X
(Ia)x = tv t t px .
t=1

40
7.1 Introduction
In practice life insurance is purchased by a life annuity of contract(gross)
premiums. These contract premiums provide not only for the benefit to
paid but also for the expenses in initiating and maintaining the insurance
and margins for profits for the insurance company. In contrast, benefit
premiums provide only for the benefit. In this chapter we will discuss
benefit premiums. The benefit premiums we will consider are those which
satisfy the equivalence principle. This principle satisfies,

E[L] = 0,

where L is called the insurer’s loss defined as the random variable of the
present value of the benefits to be paid by the insurer less the present value
of the benefit premiums to be paid by the insured. In other words,

## 7.2 Fully Continuous Premiums

In general the random variable L is defined as

L = Z − P̄ Y,

## where Z is the present value of the benefit as defined in Chapter 2, Y is the

present value of the life annuity as defined in Chapter 3 and P̄ is the annual
premium payable continuously. If the equivalence principle is applied then,

## E[L] = E[Z − P̄ Y ] = E[Z] − P̄ E[Y ] = 0.

Thus,
E[Z]
P̄ = .
E[Y ]
Consider a fully continuous level annual benefit premium for a unit
amount whole life insurance payable at the moment of death of (x), then,

## Then, using the equivalence principle we have the benefit premium,

E[v T ] Āx
P̄ (Āx ) = P̄ = = .
E[āT | ] āx

## To find the variance of L, we note that since E[L] = 0, then V ar[L] =

E[L2 ].

41
1 − vT
V ar[L] = V ar[v T − P̄ āT | ] = V ar[v T − P̄ ]
δ
P̄ P̄ P̄
= V ar[v T (1 + ) − ] = (1 + )2 V ar[v T ]
δ δ δ
P̄ 2 2
= (1 + ) [ Āx − (Āx ) ]
δ

Āx
Since P̄ = āx , then

## P̄ 2 Āx 2 δāx + Āx 2 1 2

(1 + ) = (1 + ) =( ) =( ) .
δ δāx δāx δāx
Therefore,
2
Āx − (Āx )
V ar[L] = .
(δāx )2
We now find an expression for the cdf of L in terms of the cdf of T .
1 − vT
FL (u) = P r[L ≤ u] = P r[v t − P̄ ( ) ≤ u]
δ
δu + P̄ 1 δu + P̄
= P r[v T ≤ ] = P r[T ≥ − log( )]
δ + P̄ δ δ + P̄
1 δu + P̄ P̄
= 1 − FT (− log( )) where u > −
δ δ + P̄ δ
Then, the pdf of L is
d 1 δu + P̄ 1
fL (u) = FL (u) = {fT (− log( ))}( ),
du δ δ + P̄ δu + P̄
where u > − P̄δ .
Summary of Benefit Payments
Plan bT v T P̄ Y , where Y is P̄
Whole Life 1v T āT | , T ≥ 0 P̄ (Āx ) = Āx
āx
Ā1x:n|
n-year 1v T āT | , T ≤ n P̄ (Ā1x:n| ) = āx:n|
term 0 ān| , T > n
Āx:n|
n-year 1v T āT | , T ≤ n P̄ (Āx:n| ) = āx:n|
endowment 1v n ān| , T > n
T Āx
h-payment 1v āT | , T ≤ h h P̄ (Āx ) = āx:h|
whole life 1v T āh| , T > h
h-payment 1v T āT | , T ≤ h
Āx:n|
n-year 1v T āh| , h < T ≤ n h P̄ (Āx:n| ) = āx:h|
endowment 1v n āh| , T > n

42
Example 7.1. Under the constant force of mortality µ)x(t) = µ. Given
the force of interest δ, find an expression for P̄ (Āx ).
SOLUTION:
Z ∞ Z ∞ Z ∞
µ
Āx = v t t px µx (t)dt = e−δt e−µt µdt = µ e−(µ+δ) dt = .
0 0 0 µ+δ
Z ∞ Z ∞ Z ∞
1
āx = v t t px dt = e−δt e−µt dt = e−(µ+δ) dt = .
0 0 0 µ+δ
Therefore,
µ
Āx µ+δ
P̄ (Āx ) = = 1 = µ.
āx µ+δ

Example 7.2. Show that the variance of the loss L, associated with an
n-year endowment insurance can be expressed as:
2
Āx:n| − (Āx:n| )2
V ar(L) = .
(δāx:n| )2

SOLUTION:
Define Z3 = Z1 + Z2 , where
 T 
v if T ≤ n 0 if T ≤ n
Z1 = and Z2 = .
0 if T > n vn if T > n

## Let P̄ = P̄ (Āx:n| ), then L = Z3 − P̄ Y . Thus,

 
1 − Z3 P̄ P̄
L = Z3 − P̄ Y = Z3 − P̄ ( ) = Z3 1 + − .
δ δ δ

Therefore,

     2
P̄ P̄ P̄
V ar[L] = V ar Z3 1 + − = 1+ V ar[Z3 ]
δ δ δ
2


2 Āx:n| − (Āx:n| )2
= 1+ [2 Āx:n| − (Āx:n| )2 ] =
δ (δāx:n| )2

## Remark 7.1. The following identities can be easily established:

1−δāx 1−δ Āx
1. P̄ (Āx ) = āx = Āx
;
1−δāx:n| 1−δ Āx:n|
2. P̄ (Āx:n| ) = āx:n| = Āx:n|

43
7.3 Fully Discrete Premiums
To find the benefit discrete premium P , we follow the same procedure as
in finding P̄ . Consider level annual premiums payable at the beginning of
each year for a unit whole life insurance payable at the end of the year of
death. Then, for K = 0, 1, 2, . . ..
Z = v K+1 and Y = äK+1| .
Then,
L = Z − P Y = v K+1 − P äK+1| .
This implies that using the equivalence principle
Ax
Px = P = .
äx
It can be shown easily that
2
Ax − (Ax )2
V ar[L] = .
(däx )2
0.04
Example 7.3. Suppose k| qx = c(0.96)k+1 , where k = 0, 1, 2 . . ., c = 0.96
and i = 0.06, find Px .
SOLUTION: P∞ a
We know that the sum of an infinite geometric series is k=0 ark = 1−r
and d = 1 − (1 + i)−1 .

∞ ∞ ∞  k+1
X
k+1
X
−(k+1) k+1
X 0.96
Ax = v k| qx =c (1 − 06) (0.96) =c
1.06
k=0 k=0 k=0
 0.96 
0.04 1.06
= = 0.4
0.96 1 − 0.96
1.06

1 − Ax 1 − 0.4
äx = = = 10.60.
d 1 − (1.06)−1
Therefore,
Ax 0.4
= Px = = 0.0377.
äx 10.6
To find V ar[L], we first determine 2 Ax .

∞ ∞ ∞  k+1
X X X 0.96
2
Ax = v 2(k+1) k| qx = c (1 − 06)−2(k+1) (0.96)k+1 = c
(1.06)2
k=0 k=0 k=0
0.96
!
0.04 (1.06)2
= 0.96 = 0.2445.
0.96 1 − (1.06) 2

Therefore,
2
Ax − (Ax )2 0.2445 − (0.4)2
V ar[L] = 2
= = 0.2347.
(däx ) [(0.0566)(10.60)]2

44
7.4 True m-thly Payment Premiums
Most of the time, the premium paid for an insurance policy is made several
times in a year, instead of once a year. The premium paid m times per
year, with no adjustment in the death benefit is called the true fractional
(m)
premiums. The notations Px and P (m) (Āx ) represents the true level
annual benefit premium, payable in mthly installments, for a a unit whole
life insurance payable at the end of the year of death and at the moment
of death respectively.

## Plan At End of Year At Moment of Death

(m)
Whole Life Px = A(m) x
P (m) (Āx ) = Ā(m)
x
äx äx
1(m) Ā1x:n| Ā1x:n|
(m)
n-year term P = (m) P (Ā1x:n| ) = (m)
x:n| ä ä
x:n| x:n|
(m) Ax:n| Āx:n|
n-year endowment P = (m) P (m) (Āx:n| ) = (m)
x:n| ä ä
x:n| x:n|
(m) Āx (m) Āx
h-payment, whole life h Px = (m) hP (Āx ) = (m)
ä ä
x:h| x:h|
(m) Ax:n| (m) Āx:n|
h-payment, n-year endowment hP = (m) hP (Āx:n| ) = (m)
x:n| ä ä
x:h| x:h|

We note that the actual amount of each fractional premium is P (m) /m.
The payment term h is in years. Furthermore, we express the fractional
premium as a multiple of the corresponding annual premium. Thus, for
(m)
instance we express h P as
x:n|
 
(m)
äx:h|
hP = h Px:n|  .
x:n| (m)

x:h|

Example 7.4. Calculate the level annual benefit premium payable in semi-
annual installments for a 10,000, 20-year endowment insurance with pro-
ceeds paid at the end of the policy year of death (discrete) issued to (50),
on the basis of the Illustrative Life Table with i = 0.06.
SOLUTION: From the Illustrative Life Table, we get
19
X
ä50:20| = v k k p50 = 11.291832.
k=0

## Thus, A50:20| = 1 − dä50:20| = 0.36083889. Furthermore, since i = 0.06,

we have
id i − i(2)
α(2) = = 1.0002122 and β(2) = = 0.25739081.
i(2) d(2) i(2) d(2)
Then,
(2)
ä = α(2)ä50:20| − β(2)[1 − 20 E50 ] = 11.096159.
50:20|

45
Therefore,

(2)
A50:20| 0.036083889
10000P = 10000 (2)
= 10000 = 325.19.
50:20|
ä 11.096159
50:20|

Exercise 7.1. The following problems were lifted from the textbook “Ac-
tuarial Mathematics” (2nd edition) by Bowers, Gerber, Hickman, Jones
and Nesbitt. These problems are exercises from Chapter 6 found on pp.
197-202.
1. (Ex. 6.4) A fully continuous whole life insurance with unit benefit
has a level premium. The r.v T (x), has an exponential distribution
with E[T (x)] = 50 and the force of interest is δ = 0.06. If the principle
of equivalence is used, find the benefit premium rate.
2. (Ex. 6.6) Derive an expression for
2
Āx − (Āx )2
,
(δāx )2

## where µx (t) = µ and δ is the force of interest for t > 0.

3. (Ex. 6.7) If δ = 0, show that
1
P̄ (Āx ) = .
eox

## 4. (Ex. 6.9) Show that

 
dāx d
1+ P̄ (Āx ) − Āx = µ(x).
dx dx

## 5. (Ex. 6.12) Derive expressions in terms of r and i for Ax , äx , Px and

2
Ax −(Ax )2
(däx )2 , if
k| qx = (1 − r)rk , k = 0, 1, 2, . . . .

## 6. (Ex. 6.35) If T (x) has an exponential distribution with parameter

µ.
(a) Exhibit the pdf of L;
µ−P̄
(b) Show that E[L] = µ+δ ;
(c) Use (b.) to confirm that E[L] = 0 when P̄ = P̄ (Āx ).
7. (Ex. 6.36) Use the assumptions in Exercise 6.35, with µ = 0.03 and
δ = 0.06.
(a) Evaluate P r[L ≤ 0] when P̄ = P̄ (Āx );
(b) Determine P̄ so that P r[L > 0] = 0.5.

46
8 Benefit Reserves
We note the following:
• At the issuance of an insurance or an annuity, the APV of the pay-
ment(s) to be made by the insurer is exactly equal to the APV of
the net premiums to be made by the insured. This is due to the
equivalence principle.
• As time goes on, the APV of the premiums paid by the insured gener-
ally decreases and for the insurer, if it is an annuity the APV generally
decreases and if it is an insurance the APV generally increases.
• This implies that at time t 6= 0, the value of the difference between
these two values is not zero.
• Thus, it is important that we have a measure of this difference because
the insurer needs to have enough funds when payments for benefits
are required to be given sometime at time t 6= 0.
• The difference of the value of the benefit at time over the value of
the benefit premiums at time t 6= 0. This is what we use to define
reserves.

## 8.1 Fully Continuous Reserves

To determine the prospective loss RV, we consider
• Let U be the time until death RV of (x + t), with pdf fU (u) =
u px+t µx+t (u), where u ≥ 0.

## • The prospective loss at time t is given by

tL = v u − P̄ āu|

## • The benefit reserve is E[t L].

Consider a unit whole life insurance payable at the moment of death
issued to (x) issued on a fully continuous basis with annual premiums of
P̄ (Āx ). The prospective loss is

tL = v u − P̄ (Āx )āu| ,

then the benefit reserve is E[tL]. Let E[t L] = t (V̄ Āx ). Then,

## and i = 0.06, find

47
1. P̄ (Ā35 );
2. t (V̄ Ā35 );
We consider reserves related to benefit annual premiums payable at the
beginning of each year and insurance benefit payable at the end of the year
of death.
• Let J denote the discrete RV representing the curt ate future lifetime
of (x + k) with pmf

## • The prospective loss is generally,

kL = v J+1 − P äJ+1| .

## • For a unit whole life insurance with annual benefit premium Px ,

kL = v J+1 − Px äJ+1| .

## Thus, the benefit reserve at time k is

k Vx = E[k L]
= E[v J+1 ] − Px E[äJ+1| ]
= Ax+k − Px äx+k
0.04
Example 8.2. If k qx = c(0.96)k+1 , k = 0, 1, 2, . . . where c = 0.96 and
i = 0.06, calculate

1. Px ;
2. k Vx

48