Emma Parvess

RmRM
RM 411
411 – Spring 2019
4/25/2019

Insurance
Project
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CONTENTS

Contents……………………………………………………………………………………. 1
Client Information ....................................................................... 2
Client Financial Needs ................................................................ 3
Assumptions ................................................................................ 4
Premium Calculations................................................................... 5
Recommendations to Client ......................................................... 8
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Client Information

Stuart Parvess (48), Non-Smoker

The client is a male, aged 48, who is a non-smoker. The client claims two dependents.
His household income per annum is around $160,000 before tax. The client plans on
retiring by age 65. The client is the primary “bread-winner” and brings in a total of
$115,000 before tax per annum, while his spouse earns $45,000 before tax. In the case
of the client dying, the family income would drop to $45,000.

The Federal tax rate is 22%, FICA is at 6.43%, the State Tax is 3.05% and the local tax is
2.25%, then the total after tax income of the family stands at around $119,000 before
expenses.

The expenses that the family have can be broken down into fixed and variable expenses.
The client has two children, both attending college, which he is paying for. The biggest
expenses are the mortgage on the client’s home, college loans and insurance. The
breakdown of the client’s income statement is as follows:

Figure 1:
Family Current Income Statement
 Client Financial 3

Needs

Figure 2:
If the client died, their family would run a
deficit of around $3,500 per year.

The client currently has a life insurance

policy out for $1,500,000 to be paid over 20
years. The family would receive a once off
benefit of $225 from social security. A few
expenses would change because the client is
no longer drawing expenses.

The widow would not receive Social Security

benefits as she is not drawing social security
checks and both children are over 16.

The family currently has an 18-year-old son

about to go to college, and a 21-year-old
daughter with 1 year of college remaining.
The client’s family would need to maintain
the same amount of disposable income to
maintain their lifestyle.

How many years need for loss of income?

Currently, the household disposable income for the client and spouse are $16,444.36. Therefore,
the spouse would require a disposable income of $8,222.18 in order to maintain her lifestyle
comfortably. If the client dies, the spouse’s disposable income is -$3,398.59. Since the client is
17 years from retirement, it is appropriate to account for the difference in disposable income
over 17 years. Therefore, the following calculation is performed to calculate the death benefit:

Death Benefit = ($8,222.18-(-3,398.59))∗17 𝑦𝑒𝑎𝑟𝑠= $197,553.09

Therefore, the client needs an insurance policy that would cover the loss above and beyond his
current life insurance policy with a benefit of $ $11,620.77 per year for 17 years.
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Assumptions

Mortality Rate
The 2001 Valuation Basic Table, using the tab Male & Nonsmoker, is used calculate the expected
present value of endowment insurance, whole life insurance, term insurance, whole life annuity
due and term life annuity due.

Within the VBT Table, we can find the mortality rate ( 𝒒[𝒙] , 𝒒[𝒙]+𝟏 , …) for a select life aged 48 is
0.00077, 0.00099, and so on. To calculate the survival rate ( 𝒑[𝒙] , 𝒑[𝒙]+𝟏 ,...) is calculated by:
𝒑[𝒙]+𝒕 = 𝟏 − 𝒒[𝒙]+𝒕

K-year deferred mortality rate or 𝜿|𝒒[𝒙] is calculated by:

𝒌|𝒒[𝒙] = 𝜿𝒑 𝒙 ∗ 𝒒𝒙+𝒌

Interest Rate
The ultimate age is 120, so for when k = 0,1…,72, we calculate the discount factor (𝒗𝒌+𝟏 ) is
calculated with interest rate 2.82%.
𝒌+𝟏
𝒌+𝟏
𝟏
𝒗 =( )
𝟏 + 𝟎. 𝟎𝟐𝟖

This is based off 20-year treasury yield (https://ycharts.com/indicators/20_year_treasury_rate).

The 20-year treasury yield is used, because the client plans to retire in 17 years and would be
making hypothetically earning income for that time.
Expense Assumption
The following table provides the expense assumptions. There is a termination fee of $30
Premium 5

Calculations

Benefit Calculations
The EPV for the endowment insurance, with a term of 17 years, is calculated by adding
a pure endowment to the term life insurance. The formula is:
𝟏
̅̅̅̅̅ =
A[48]:17| ̅̅̅̅̅ + 𝟏𝟕𝑬𝟒𝟖 = $0.78
A[48]:17|

The pure endowment is calculated as 𝒗𝟏𝟕 ∗ 𝟏𝟕𝒑𝟒𝟖 = $0.58

To calculate the expected present value of the whole life insurance, we multiply the
sum insured of $11,620.77 by the summed product of 𝒗𝒌+𝟏 and 𝒌|𝒒[𝒙] .

𝑨[𝟒𝟖] = ∑𝟕𝟐
𝒌=𝟎 𝒌|𝒒[𝒙] ∗ 𝒗
𝒌+𝟏
= $0.41

The EPV of the term life insurance, for a term of 17 years, is calculated by the following
formula:
A1[48]:17|
̅̅̅̅̅ = 𝑨𝟒𝟖 − 𝟏𝟕𝑬𝟒𝟖 ∗ 𝑨𝟔𝟓 = $0.20

The formula for the whole life annuity due is calculated:

𝟏−𝑨[𝟒𝟖]
𝒂̈ [𝟒𝟖] = = $21.62
𝒅

The formula for the term life annuity due is calculated:

𝟏− A[48]:17|
̅̅̅̅̅
𝒂̈ [𝟒𝟖]:𝟏𝟕| = = $𝟖. 𝟎𝟐
𝒅
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Expense Calculations
The expense assumptions are mentioned above.

The following calculations are used to calculate the EPV for expenses:

EPV(Whole Life Expenses)

= [(𝟎. 𝟖𝟐 − 𝟎. 𝟏𝟒) ∗ 𝑷𝒘𝒉𝒐𝒍𝒆𝑳𝒊𝒇𝒆 ] + [𝟎. 𝟏𝟒 ∗ 𝑷𝒘𝒉𝒐𝒍𝒆𝑳𝒊𝒇𝒆 ∗ 𝒂̈ [𝟒𝟖] ]

+(𝟐𝟎𝟎 − 𝟏𝟎𝟎) + [𝟏𝟎𝟎 ∗ 𝒂̈ [𝟒𝟖] ] + 𝟑𝟎 ∗ 𝑨[𝟒𝟖]

EPV(Endowment Expenses)

= [(𝟎. 𝟖𝟐 − 𝟎. 𝟏𝟒) ∗ 𝑷𝒆𝒏𝒅𝒐𝒘𝒎𝒆𝒏𝒕 ] + [𝟎. 𝟏𝟒 ∗ 𝑷𝒆𝒏𝒅𝒐𝒘𝒎𝒆𝒏𝒕 ∗ 𝒂̈ [𝟒𝟖]:𝟏𝟕| ]

+(𝟐𝟎𝟎 − 𝟏𝟎𝟎) + [𝟏𝟎𝟎 ∗ 𝒂̈ [𝟒𝟖]:𝟏𝟕| ] + 𝟑𝟎 ∗ 𝐀[𝟒𝟖]:𝟏𝟕|

̅̅̅̅̅

EPV(Term Expenses)

= [(𝟎. 𝟖𝟐 − 𝟎. 𝟏𝟒) ∗ 𝑷𝒕𝒆𝒓𝒎𝑳𝒊𝒇𝒆 ] + [𝟎. 𝟏𝟒 ∗ 𝑷𝒕𝒆𝒓𝒎𝑳𝒊𝒇𝒆 ∗ 𝒂̈ [𝟒𝟖]:𝟏𝟕| ]

+(𝟐𝟎𝟎 − 𝟏𝟎𝟎) + [𝟏𝟎𝟎 ∗ 𝒂̈ [𝟒𝟖]:𝟏𝟕| ] + 𝟑𝟎 ∗ 𝐀𝟏[𝟒𝟖]:𝟏𝟕|

̅̅̅̅̅

Premium Calculations
Premiums are calculated using the following general formula:

g
E(L0 ) = EPV(benefits) + EPV(expenses) − EPV(premiums)

The premiums can be calculated by setting the EPV of the gross loss function to 0
under the Equivalence Principle.
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Set EPV to 0 and solve for P

𝐄𝐏𝐕(𝐋𝐰𝐡𝐨𝐥𝐞 ) = ( 𝟏𝟏, 𝟔𝟐𝟎. 𝟕𝟕 + 𝟑𝟎) ∗ 𝐀 [𝟒𝟖] + 𝟎. 𝟔𝟖 ∗ 𝐏𝐰𝐡𝐨𝐥𝐞𝐋𝐢𝐟𝐞 + 𝟏𝟎𝟎

−𝟎. 𝟖𝟔 ∗ 𝐏𝐰𝐡𝐨𝐥𝐞𝐋𝐢𝐟𝐞 ∗ 𝐚̈ [𝟒𝟖]

𝐄𝐏𝐕(𝐋𝐞𝐧𝐝𝐨𝐰𝐦𝐞𝐧𝐭 ) = ( 𝟏𝟏, 𝟔𝟐𝟎. 𝟕𝟕 + 𝟑𝟎) ∗ 𝐀 [𝟒𝟖]:𝟏𝟕| + 𝟎. 𝟔𝟖 ∗ 𝐏𝐞𝐧𝐝𝐨𝐰𝐦𝐞𝐧𝐭 + 𝟏𝟎𝟎

−𝟎. 𝟖𝟔 ∗ 𝐏𝐞𝐧𝐝𝐨𝐰𝐦𝐞𝐧𝐭 ∗ 𝐚̈ [𝟒𝟖]:𝟏𝟕|

𝐄𝐏𝐕(𝐋𝐭𝐞𝐫𝐦 ) = ( 𝟏𝟏, 𝟔𝟐𝟎. 𝟕𝟕 + 𝟑𝟎) ∗A1[48]:17|

̅̅̅̅̅ + 𝟎. 𝟔𝟖 ∗ 𝐏𝒕𝒆𝒓𝒎 + 𝟏𝟎𝟎
−𝟎. 𝟖𝟔 ∗ 𝐏𝐭𝐞𝐫𝐦 ∗ 𝐚̈ [𝟒𝟖]:𝟏𝟕|

Annual Premiums
Whole Life Insurance Premium $391.09
Term Insurance Premium $525.77
Endowment Premium $1,606.20

Annual Premiums are calculated using solver in Excel. The premium is solved for when
the EPV of the premium is equal to 0.
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Recommendation to Client
The client does have a family history of heart disease and works in construction which
can be a dangerous environment. If the client were to pass their family would be
heavily impacted financially. If the client dies before retirement, which is a possibility,
they would need to have insurance to help their family maintain the same level of
comfort.

The best choice in insurance for the client is endowment insurance. As the client
already has a whole life insurance policy of $1,500,000, they are covered should they
pass after retirement. Term is more affordable but after speaking with the client they
wouldn’t want the money invested in the insurance to not yield any return. The client
views this not only as protection but also as an investment looking towards retirement.