Simple Life Products

Administrative Issues Unit Overview Death Benefits Annuities
ETC3530 Contingency
Dan Zhu
Monash Business School

Monash University, Australia
Semester 2, 2018
July 22, 2019
|
Basic Introduction to Life

Insurance
|
Outline
1 Administrative Issues
2 Unit Overview
Overview of Life Insurance
Contingencies in a netshell
Types of policies
Life Product Notation
3 Death Benefits
While Life
Term Assurance on Death
Pure Endowment
Endowment Assurance
4 Annuities
Immediate Annuity
Immediate annuity due
Maximum-term immediate annuity
Minimum-term immediate annuity
|
The computation of EPV
Contingencies is the course that teaches you the calculation of

Z
EPV = S(t)v t P(t)dt
ΩT
where
ΩT is the support of the random variable T .
S(t) is the payment size at time t
v t = (1 + i)−t is the discount factor
P(t) is the probability or intensity of the random variable
T = t.
| Contingencies in a netshell
ΩT
ΩT is the support of the random variable T , where T can be

the future life time of one person
the first failure of two people
the last failure of two people
We can also consider the number of full years that one
survived(discrete distribution).
P(t): Life Table
Definition
The life table is a device for calculating the actuarial functions
t px and t| qx . The key definition in a life table is the relationship:
t+s px = t px s px+t = s px t px+s
Our random variable of consideration is a future life, hence

P(t) =t Px if payment on survival
P(t) =t Px µx+t if payment on death
P(t) = t| qx if payment at the end of year of death(discrete).
v t and S(t)
For this unit, we always assume constant rate of interest hence
v t = (1 + i)−t
however in reality, stochastic interest is often used by life

insurance companies. The payment size S(t) in this unit we
consider three cases
S(t) = C constant level
S(t) = C(1 + d)t compound increasing or decreasing.
S(t) = C + dt linear increasing or decreasing.
Types of policy 1 - death benefits only
At the most basic level we can separate life insurance contracts

into those which pay benefits on death and those which pay
benefits on survival. Policies which pay benefit on death only
are:
Whole life or whole of life policies pay benefit on death,
premiums payable through life (no longer popular in
Australia)
Term assurance contract pays fixed benefit on death within
a specified period (eg 10 years), known as the term of the
policy, and premium normally paid for the same term
(cheap temporary protection - popular)
| Types of policies
Types of Policy 2–Survival benefits only
Immediate annuity pays regular payment for life, usually

purchased with single premium (not popular for emotional
reasons)
Temporary annuity pays regular amount for life with a
maximum term
Deferred annuity pays regular amount for life from (say)
age 60, often purchased with regular premiums before
commencement age
Pure endowment fixed amount on survival to end of a
specified term only
| Types of policies
Type of Policy3- Hybrids etc
Endowment assurance (sometimes just endowment) pays

fixed amount on survival for a fixed term or on prior death
within term
Minimum term annuities pay regular amounts for life but
with a minimum number of years’ payments if life assured
dies within the minimum term
Critical illness death benefits may be advanced on
confirmed diagnosis of specified illnesses
| Types of policies
Premiums Always paid in advance
usually annually for life with WL policy

may also be paid more frequently eg monthly
in some cases by single premium
premium term sometimes less than benefit term - eg WL
policy with premiums to age 65, But not other way around:
eg 20 years’ premiums for 15 year term assurance is not
OK.
| Types of policies
The random variable Tx
The future life of a person aged x is a random variable denote

by Tx :
Tx ∼ fTx (t) =t px µx+t
Tx is a continuous distribution
t pxis the probability of a person aged x now survive to
time t.
µx+t is the force of mortality at age x + t.
| Life Product Notation

The continuous random variable Tx

2
suppose µx+t = 0.1t →t px = exp−0.05t
f T (t)
x
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
0 1 2 3 4 5 6 7 8 9 10
t

The random variable V Tx and Āx

We can easily construct functions of Tx , functions of random
variables are also random variable. Here,
V Tx = (1 + i)−Tx or exp−δTx
the present value of a payment of 1 due on the death of (x) and

a fixed rate of interest of i p.a.
If an insurance company has a large number of these

insurance policies, by LLN
n
1 X Txi
V → A¯x = E(v Tx ) (1)
n
i=1
A¯x is the symbol for “EPV of 1 due on the death of (x)”.

Assumptions
Underlying assumptions behind the calculation of equation 1
are:
(a) a constant rate of interest
(b) a large number of independent lives
(c) correct probabilities of payments being made and rates of
interest

Questions and challenges:

(a) Time dependent and stochastic nature of interest rate,
(b) Non-independent risks (eg natural disaster)
(c) Mortality changes over time(AIDS, SARS, influenza,
bird-flu, swine flu, improving health-care)
(d) Although we will normally assume independent lives,
standard mortality tables and constant rates of interest,
there are difficulties in all of these assumptions.

Whole of life insurance
Definition
A benefit (known as the sum assured) paid to the policyholder
on death of the life assured.
The amount payable is known, but the timing is unknown at
issue
the present value of the benefit is not known
the PV of benefit is a random variable
we can calculate moments of the PV.
Death Benefits | While Life

WL benefit
1 WL benefit: If 1 payable immediately on the death of (x),
then the PV of the benefit is
ν Tx .
2 WL benefit: 1 payable at end of year of death of (x)
Definition
Kx = bTx c
The complete number of years (x) lives and given a mortality
table with the probability function
Pr{Kx = k} = Pr {k ≤ Tx < k + 1} =k| qx =k px × qx+k
The benefit will therefore be paid at time Kx + 1 and its PV

is
v Kx +1
Moments of Present Value

Hence we can determine the first and second moments of the
unit WL benefit payable at the end of year of death, denoted by
Ax and 2 Ax as follows:
h i X∞ ∞
X
Ax = E v Kx +1 = v k+1 × Pr {Kx = k} = v k+1 k| qx (2)
k=0 k=0
and
2 Kx +1 ∞
X
2 Kx +1 2
Ax = E v =E v = v 2×(k+1) k | qx (3)
k=0
We now have the variance of the present value of this benefit:

h i 2 h i2
Var v Kx +1
=E v Kx +1
− E v Kx +1 = 2 Ax − (Ax )2

Remark
The first and second moments of the PV of the WL benefit

are calculated from the same mortality table using different
rates of interest.
“at the end of the year of death of (x)”
x is the current age ie when policy is taken out
‘year of death’ means policy year
k| qx relates death at age x + k to x + k + 1
benefit of 1 paid at time k + 1 ie age x + k + 1
x may not be an integer (but normally will be)

Evaluation of Ax and 2 Ax
In theory, you could be asked to evaluate by some simplifying

assumptions such as a constant µx , or lx = 100 − x for
0 ≤ x ≤ 100, or Gompertz with given parameters.
In practice, we will deal with values of qx that are genuine

estimates of rates of mortality (from graduated life tables see
H2005), and we would normally use a spread sheet to
calculate.
ω−x−1
X
Ax = E[v Kx +1 ] = v k+1 k| qx
k=0

Tabulated Tables
Example
For example, find out the EPV and StDev of PV of $100,000
payable at the end of the year of death of (50) using H2005
ultimate mortality table and 6% pa interest.
A50 = 0.29481, 2 A40 = 0.12272.

EPV = 100,000 ×A50 = $29, 481,
0.5
StDev = 100,000 × 2 A50 − (A50 )2 = $18, 923.
2
Note that we use the value in the Ax column for the second
moment.

Calculating Ax and 2 Ax from 1st principles
If a value is not tabulated, for example A50 at 10% per annum

effective is not available in H2005, then there are two methods
of proceeding.
As a first approach, we could use a spreadsheet to generate
values of t| q50 :
(1) the first column starting with 0 p50 = 1 and
(2) calculating t p50 =t−1 p50 × (1 − q50+t−1 ) and
(3) in 2nd column t| q50 =t p50 × q50+t or t| q50 =t p50 −t+1 p50 .
The next two columns in our spreadsheet are t| q50 × 1.1−(t+1)
and t| q50 × 1.1−2×(t+1) which are then added to give A50 and
2A
50 respectively.

Calculating Ax and 2 Ax by recursion
Anyone alive at ω − 1 dies in a year so Aω−1 = v

If (x) survives to age x + 1 EPV at time 1 = Ax+1
If (x) survives a year EPV at time 0 = v × Ax+1
If (x) dies within 12 months EPV at time 0 = v
Ax = qx × v + px (v × Ax+1 ) = v × (qx + px Ax+1 )

2
Ax = v 2 × qx + px × 2 Ax+1

Term Assurance
Definition
A Term assurance Covers Temporary commitments
benefit payable on death within assured period only
no benefit on survival to end of term
$1 payable at end of year of death for a person aged (x) within
n years.
Benefit has the present value

K +1
Kx +1 v x if Kx = 0, 1, . . . , n − 1
PV = V IKx <n =
0 if Kx ≥ n
the EPV of this benefit is given by:
n−1
X
EPV = v k+1 k| qx = A 1 (4)
x:n
k=0
Death Benefits | Term Assurance on Death
Variance of PV of term assurance benefit
n−1
X
E[PV 2 ] = v 2(k+1) k| qx =2 A 1
x:n
k=0
2
2
Var (PV ) = A 1 − A1
x:n x:n

Evaluating EPV and Var of term assurance benefit
(a) By direct summation if this is short term:

q30 = 0.001, q31 = 0.0015, q32 = 0.002, i = 0.05
2
X
A1 = v k+1 k| q30
30:3
k=0
0.001 0.999 × 0.0015 0.999 × 0.9985 × 0.002
= + +
1.05 1.052 1.053
= 0.004035
(b) Using recursion formulae

A 1 = v qx + px A 1
x:n x+1:n−1

(c) By Reference to WL functions

A 1 = Ax − v n n px Ax+n
x:n
n−1
X ∞
X ∞
X
k+1 k+1
A1 = v k| qx = v k| qx − v k+1 k| qx
x:n
k=0 k=0 k=n
∞
X
= Ax − v k+1 k px qx+k
k=n
∞
X
= Ax − v n n px v k−n+1 k−n px+n · qx+n+k−n
k=n
X∞
= Ax − v n n px v r +1 r px+n · qx+n+r
r =0
∞
X
= Ax − v n n px v r +1 r | qx+n = Ax − v n n px Ax+n
Death Benefits | Term Assurance on Death r =0
Similarly, you can derive the second moment result as an

exercise!
2
A 1 = 2 Ax − v 2n n px 2 Ax+n
x:n
Example
Calculate the EPV and StDev of the PV of a term assurance
benefit of $100,000 payable at the end of the year of death of
(40), but only if death occurs within the next 10 years. Use
H2005 ultimate mortality and interest of 4.5% per annum
effective. Given that A40 = 0.271972, A50 = 0.384278, 2 A40 =
0.099773, 2 A50 = 0.181186 4.5%.

Solution
l50
A1 = A40 − 1.045−10 A50
40:10 l40

−10 903323
EPV = 100000 × 0.291972 − 1.045 0.384278
948141
= $3, 622

2 2 2 −20 903323 2
E[PV ] = 100000 A40 − 1.045 A50
948141
= 1010 × 0.02820
p
StDev (PV ) = 105 0.02820 − 0.036222 = $16, 397

Pure Endowment benefits
Definition
A Pure Endowment benefit Covers Temporary commitments
benefit payable on survival at the end of the term only
no benefit on death over the period.
Consider 1 payable on survival of (x) for n years

n
v if Kx ≥ n
PV = V n IKx ≥n =
0 if Kx = 0, 1, . . . , n − 1
EPV = v n n px + 0 = A 1
x:n
E[PV 2 ] = v 2n n px = 2 A 1
x:n
Death Benefits | Pure Endowment

Calculate EPV and StDev(PV) of $10,000 due on

survival of (40) for 15 years
Basis: H2005 6% pa
l55
A 1 = 1.06−15
40:15 l40
861292
= 10000 × 1.06−15
= $3, 790.40
948141
861292
E[PV 2 ] = 108 × 1.06−30 = 0.15816 × 108
p 948141
StDev (PV ) = 104 0.15816 − 0.379042 = $1, 204
Death Benefits | Pure Endowment

Endowment Assurance
Definition
Benefit payable on death of the life assured within the term of
the contract, or on survival of the life assured to the end of the
term of the contract
combination of pure endowment and term assurance

“endowment” ambiguous - often means endowment
assurance
Death Benefits | Endowment Assurance

$1 payable at end of year of death of (x) within n years

or on survival n years
As before, we denote by Kx the curtate future lifetime of (x).

The benefit is
(
min(Kx +1,n) v Kx +1 , ifKx = 0, 1, . . . , n − 1
PV = v =
v n otherwise
Pr[Kx = k] = k| qx , k = 0, 1, 2, . . .
Pr[Kx ≥ n] = n px
n−1
X
EPV = v k+1 k| qx + v n n px
k=0

2nd moment of PV of EA benefit

Before we continue, we know that PV here is the sum of term
assurance and pure endowment
n−1
X
EPV = v k+1 k| qx + v n n px = Ax:n
k=0
= A1 +A 1
x:n x:n
2nd moment
n−1
X
E[PV 2 ] = v 2(k+1) k| qx + v 2n n px = 2 Ax:n
k=0
2
2
Var (PV ) = Ax:n − Ax:n

EA payable at end of year of death (alternative)
If (x) dies in (n − 1, n] death benefit also paid at n

(
v Kx +1 , ifKx = 0, 1, . . . , n − 2
PV =
v n otherwise
n−2
X
EPV = v k+1 k| qx + v n n−1 px
k=0

EA, Term assurance and Pure Endowments
Let
X = V min(Kx +1,n)
Y = V Kx +1 IKx <n
Z = V n IKx ≥n
we have
X =Y +Z
hence
E[X ] = E[Y ] + E[Z ]
but
Var (X ) 6= Var (Y ) + Var (Z )
as Y and Z are correlated.

EA, Term assurance and Pure Endowments
Var (X ) = Var (Y ) + Var (Z ) + 2Cov (Y , Z )

= Var (Y ) + Var (Z ) + 2E[YZ ] − 2E[Y ]E[Z ]
Now YZ = 0, and thus

2 2
Var [X ] = 2A 1 − A1 + 2A 1 − A 1 − 2A 1 A 1
x:n x:n x:n x:n x:n x:n
2
2 2
= A1 + A 1 − A1 +A 1
x:n x:n x:n x:n
= 2 Ax:n − (Ax:n )2

Evaluating Ax:n and 2 Ax:n
Straight summation using the basis H2005 ultimate 6%:
A40:3 = v 0| q40 + v 2 1| q40 + v 3 2 p40

0.003058 0.996942 × 0.003357 0.996942 × 0.99664
= + +
1.06 1.062 1.063
= 0.840105

Relating Ax:n and 2 Ax:n to WL functions

Recursive formulae for Ax:n and 2 Ax:n
Ax:n = v × (qx + px Ax+1:n−1 )

2
Ax:n = v 2 × (qx + px × 2 Ax+1:n−1 )
Ax:n = A1 + v n n px
x:n
= Ax − v n n px Ax+n + v n n px
= Ax + v n n px (1 − Ax+n )
Example H2005 ultimate 6%:
l43
A40:3 = A40 + v 3 (1 − A43 )
l40
938596
= 0.19018 + 1.06−3 (1 − 0.21806) = 0.84010
948141
Deferred assurances
Definition
a benefit of 1 paid at the end of year of death of (x) but only if
death occurs after n years
PV = V Kx +1 IKx ≥n
Its EPV
n| Ax == Ax − A 1 = v n n px Ax+n
x:n
its variance
∞
X
2 2(k+1)
n| Ax = k| qx v .
k=n

Annuities
Series of payments
often of an equal amount, but not always, eg CPI indexed
annuities
payable at regular intervals eg quarterly
may be payable
for a fixed term
while a person (annuitant) lives
temporary while annuitant lives
while annuitant lives, with minimum term
Annuities |
Immediate annuity
Definition
A unit immediate annuity for life is $1 is payable at end of year
while (x) is alive.
The present value as function of random variable is
1 − V Kx V − V Kx +1
PV = aKx = =
i d
and its
∞
X
EPV = E[aKx ] = ak k| qx = ax .
k=1
Annuities | Immediate Annuity

P∞
Evaluating k =0 ak k | qx
Use a spreadsheet; generate k| qx from values of qx starting

with 0 px = 1 and then using the recursive relationship
k px = k−1 px × (1 − qx+k−1 ),
then k| qx = k px × qx+k .
Then tabulate ak and multiply the two rows and add up the
answer.

Evaluating ax by premium conversion
Here we evaluate ax from tabulated values of Ax

at the same interest rate.
∞
X
ax = ak k| qx
k=0
∞ ∞
X 1 − vk X v − v k+1
= qx = k| qx
i k| vi
k=0 k=0
∞ ∞
v X 1 X k+1
= q
k| x − v k| qx
vi vi
k=0 k=0
v − Ax
= .
d

Evaluating ax by recursion
∞
X ∞ X
X k ∞ X
X ∞
ax = ak k| qx = v j k| qx = v j k| qx (∗)
k=1 k=1 j=1 j=1 k=j
X∞ ∞
X X∞
= vj k| qx = v j j px
j=1 k=j j=1
(In this form ax can also be evaluated by spreadsheet)

Substituting t = j − 1, this becomes:
∞
X
ax = vpx + vpx v t t px+1 = vpx (1 + ax+1 )
t=1
starting with aω−1 = 0.

Annuity variances
Unlike assurance/death benefits, the 2nd moment of annuity

benefits at rate of interest i cannot be simply determined by
calculating the EPV at interest rate j = (1 + i)2 − 1.
2 ∞
2
X 2
E PV =E aKx = ak k| qx
k=1
X∞
2
6= ak × k| qx or 2 ax
k=1
(Can you explain by general reasoning?)

2
At 6% pa, a5 = 4.22 ≈ 18, but 2 a5 = 3.6.
We need to use other methods (later lecture).

Immediate annuity due
Definition
Benefit of 1 per annum in advance for life while (x) lives.
Hence, the benefit

PV = äKx +1
h i X∞
EPV = äx = E äKx +1 = äk+1 k| qx
k=0
∞ X
X k ∞ X
X ∞
= v j k| qx = v j k| qx
k =0 j=0 j=0 k=j
X∞
= v j j px
j=0
Annuities | Immediate annuity due

Evaluating äx
Premium conversion
1 − E v Kx +1

1 − v Kx +1

h i 1 − Ax
äx = E äKx +1 = E = =
d d d
Recursion
∞
X ∞
X ∞
X
j j
äx = v j px = 1 + v j px = 1 + vpx v j−1 j−1 px+1
j=0 j=1 j=1
Substituting t = j − 1, gives:
∞
X
äx = 1 + vpx v t t px+1 = 1 + vpx äx+1
t=0
and the starting value is äω−1 = 1.

Annuities | Immediate annuity due
Maximum-term immediate annuity
Definition
A unit maximum-term immediate annuity is $1 payable at end of
year while (x) is alive for at most n years.
(
ak if Kx < n
PV = aMin(Kx ,n) =
an otherwise,
Annuities | Maximum-term immediate annuity

h i Xn−1 ∞
X
EPV = E aMin(Kx ,n) = ak k| qx + an k| qx
k=1 k=n
n−1 X
X k n−1
X n−1
X
= v j k| qx + n px an = vj
k| qx + n px an
k=1 j=1 j=1 k=j
n−1
X n−1
X
vj v j + n px v n

= j px − n px + n p x
j=1 j=1
n
X
= v j j px = ax:n
j=1

Evaluating äx:n and ax:n
1. By summation from äx:n = n−1 j

P
j=0 v j px .
2. By reference to tabulated values of äx
n−1
X ∞
X ∞
X
äx:n = v j j px = v j j px − v j j px
j=0 j=0 j=n
∞
X
= äx − v n n px v j−n j−n px+n
j=n
X∞
= äx − v n n px v t t px+n = äx − v n n px äx+n
t=0

Premium conversion : d äx:n + Ax:n = 1
This is only true for äx:n .

" #
h i 1 − v Min(Kx +1,n)
äx:n = E äMin(Kx +1,n) = E
d
Min(K +1,n)
1−E v x
1 − Ax:n
= =
d d
Similarly,
" #
h 1 − v Min(Kx ,n)
i
ax:n = E aMin(Kx ,n) = E
i
Min(K +1,n+1)
v −E v x v − Ax:n+1
= =
vi d

Premium conversion for äx:n

Finally, we need to show that d äx:n + Ax:n = 1 , the premium
conversion relationship. This is only true for äx:n .
" #
h i 1 − v Min(Kx +1,n)
äx:n = E äMin(Kx +1,n) = E
d
Min(K +1,n)
1−E v x
1 − Ax:n
= =
d d
Similarly,
" #
h i 1 − v Min(Kx ,n)
ax:n = E aMin(Kx ,n) = E
i
Min(K +1,n+1)
v −E v x v − Ax:n+1
= =
vi d
There is an alternative proof of the relationship starting with the
summation formula for äx:n that is more tedious.
Minimum-term immediate annuity
Definition
A unit Minimum-term immediate annuity is 1 payable at end of
year for at least n years and thereafter while (x) is alive.
(
an if Kx < n
PV = amax(Kx ,n) =
Kx otherwise
Annuities | Minimum-term immediate annuity

n−1
X ∞
X
EPV = k | qx an + k| qx ak
k=0 k=n
∞
X
n
= an (1 − n px ) + k| qx an + v ak−n
k=n
∞
X ∞
X
n
= an (1 − n px ) + an k| qx + n px k−n| qx+n v ak−n
k=n k=n
∞
X
= an (1 − n px ) + an n px + v n n px t| qx+n at
t=0
= an + v n n px ax+n
= ax:n

Minimum-term immediate annuity due
Definition
A unit Minimum-term immediate annuity due is 1 payable
annually in advance for a minimum of n years and thereafter
while (x) lives.
Its EPV is given by is given by:
äx:n = än + v n n px äx+n

Example
consider an annuity of $10,000 per annum payable annually in
arrear while (50) is alive with a guaranteed minimum payment
period of 5 years. Using H2005 ultimate and 5% per annum
10000 × a5 + v 5 5 p50 a55

1 − 1.05−5

−5 861292
= 10000 × + 1.05 (12.262 − 1)
0.05 903323
= $127, 430

Annuity variances - annuities in advance

1 pa for max n years annually in advance while (x) lives
" # " #
h i 1 − v min(Kx +1,n) v min(Kx +1,n)
Var ämin(Kx +1,n) = Var = Var
d d
v min(Kx +1,n) = PV (n year EA benefit)

h i 2 A − (A )2
x:n x:n
⇒ Var ämin(Kx +1,n) =
d2
For an annuity of 1 pa in advance for life, we have
1 − v Kx +1
Kx +1
h i v
Var äKx +1 = Var = Var
d d
h i 2 A − (A )2
x x
v Kx +1 = PV (WL benefit) ⇒ Var äKx +1 =
d2
Annuity variances max-term annuities in arrear
1 pa for max n years annually in arrear while (x) lives

"
h i h i 1 − v min(Kx +1,n+1)
Var amin(Kx ,n) = Var ämin(Kx +1,n+1) − 1 = Var −
d
" # 2A
v min(Kx +1,n+1) x:n+1 − (Ax:n+1 )2
= Var =
d d2
Var[PV of n-year annuity in arrear]
= Var[PV of n + 1-year annuity in advance]
(because the difference between these RVs is the constant
payment of 1 due at time 0)

Deferred annuities
Definition
A benefit of 1 per annum paid while (x) is alive but after n
years; i.e. payments at n, n + 1, n + 2, . . . if (x) alive
PV = v n äKx −n+1 IKx ≥n

∞
X
n| äx = v n äk−n+1 k| qx
k=n
X∞ ∞
X ∞
X
= (äk+1 − än )k| qx = äk+1 k| qx − än k| qx
k=n k=n k=n
X∞ n−1
X
= äk +1 k| qx − äk+1 k| qx − än n px
k=0 k=0
Annuities |
= ä − ä
x
Minimum-term immediate x:n
annuity
= v n n px äx+n
Deferred annuities (as sum of series of EPVs)
P∞
We wish to show n| äx = k=n v k k px
∞
X
n| äx = v n äk−n+1 k| qx
k=n
X∞ −n
kX ∞ k−n
X X
= vn v j k| qx = v j+n k| qx
k=n j=0 k=n j=0
∞ X
X k ∞ X
X ∞ ∞
X
t t
= v k| qx = v k| qx = v t t px
k=n t=n t=n k=t t=n

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Administrative Issues Unit Overview Death Benefits Annuities

Monash Business School

July 22, 2019

Basic Introduction to Life

The computation of EPV

Contingencies is the course that teaches you the calculation of

ΩT is the support of the random variable T , where T can be

P(t): Life Table

t+s px = t px s px+t = s px t px+s

Our random variable of consideration is a future life, hence

For this unit, we always assume constant rate of interest hence

however in reality, stochastic interest is often used by life

Types of policy 1 - death benefits only

At the most basic level we can separate life insurance contracts

Types of Policy 2–Survival benefits only

Immediate annuity pays regular payment for life, usually

Type of Policy3- Hybrids etc

Endowment assurance (sometimes just endowment) pays

Premiums Always paid in advance

usually annually for life with WL policy

The random variable Tx

The future life of a person aged x is a random variable denote

| Life Product Notation

The continuous random variable Tx

| Life Product Notation

The random variable V Tx and Āx

the present value of a payment of 1 due on the death of (x) and

If an insurance company has a large number of these

A¯x is the symbol for “EPV of 1 due on the death of (x)”.

| Life Product Notation

Questions and challenges:

| Life Product Notation

Whole of life insurance

Death Benefits | While Life

Pr{Kx = k} = Pr {k ≤ Tx < k + 1} =k| qx =k px × qx+k

The benefit will therefore be paid at time Kx + 1 and its PV

Moments of Present Value

We now have the variance of the present value of this benefit:

Death Benefits | While Life

The first and second moments of the PV of the WL benefit

Death Benefits | While Life

In theory, you could be asked to evaluate by some simplifying

In practice, we will deal with values of qx that are genuine

Death Benefits | While Life

A50 = 0.29481, 2 A40 = 0.12272.

Death Benefits | While Life

Calculating Ax and 2 Ax from 1st principles

If a value is not tabulated, for example A50 at 10% per annum

Death Benefits | While Life

Calculating Ax and 2 Ax by recursion

Anyone alive at ω − 1 dies in a year so Aω−1 = v

Ax = qx × v + px (v × Ax+1 ) = v × (qx + px Ax+1 )

Death Benefits | While Life

Benefit has the present value

Variance of PV of term assurance benefit

Death Benefits | Term Assurance on Death

Evaluating EPV and Var of term assurance benefit

(a) By direct summation if this is short term:

(b) Using recursion formulae

Death Benefits | Term Assurance on Death

(c) By Reference to WL functions

Similarly, you can derive the second moment result as an

Death Benefits | Term Assurance on Death

Death Benefits | Term Assurance on Death