The Life table

(Mortality table)

Week 4

1
 Road Map

⚫ Basic definitions
⚫ Probabilities
⚫ Constructing life tables from the values of qx
⚫ Life expectancy
⚫ Choice of life tables
⚫ Standard notation and terminology
⚫ A sample table

2
 Constructing life table from the values
of qx

⚫ Take the values of 𝑞𝑥 as given

⚫ The life table can then be constructed
inductively, starting with 𝑙0 from the formula:
𝑑𝑥 = 𝑙𝑥 𝑞𝑥
𝑙𝑥+1 = 𝑙𝑥 − 𝑑𝑥
In practice life tables are available for
the necessary computations

3
 With life tables the figures may be computed directly
without carrying out any observation!
How long can a person age 𝑥 expect to live?
Life expectancy

⚫ Take 4 people exactly at age 50

One dies at age 6413 , another at age 68,
the other at 7014 and the fourth at age 9012
⚫ The average total future life time is:

1413 + 18 + 2014 + 4012

≃ 23.3
4
⚫ On average a person age 50 will live another
23.3 years
4
 𝜔 − 1 last age anyone will be living

Life expectancy cont’d

⚫ Start with 𝑙𝑥 people at age 𝑥

⚫ After 1 year there will be 𝑙𝑥+1 survivors who
would have contributed 1 year to their life
⚫ After 2 years there will be 𝑙𝑥+2 survivors who
would have contributed 2 years to their life
⚫ Continuing this way, the total future life time of all
lives is
𝑙𝑥+1 + 𝑙𝑥+2 +. . . + 𝑙𝜔−1
5
 Life expectancy cont’d
𝜔−𝑥−1 𝜔−𝑥−1
𝑙𝑥+𝑘
𝑒𝑥 = ෍ = ෍ 𝑘 𝑝𝑥
𝑙𝑥
𝑘=1 𝑘=1
(Curtate life expectancy/curtate expectation of life at age 𝑥)
Curtate because it ignores the fraction of the
year lived in the year of death
𝑜 1
𝑒 = 𝑒𝑥 +
2
6 (Complete life expectancy)
 Backward recursion formula

Life expectancy cont’d

⚫ Recursion formula for 𝑒𝑥

𝑒𝑥 = 𝑝𝑥 + 2𝑝𝑥 + 3𝑝𝑥 +. . . + 𝜔−𝑥−1𝑝𝑥
= 𝑝𝑥 (1 + 𝑝𝑥+1 + 2𝑝𝑥+1 +. . . + 𝜔−𝑥−2𝑝𝑥+1 )
= 𝑝𝑥 1 + 𝑒𝑥+1
(:, to live any whole number of years in the future, x must live to age x+1)

with initial value 𝑒𝜔 = 0

7
 Life expectancy cont’d

⚫ Notes
– Life expectancy is a function of age
⚫ For each age x, the life expectancy at that age gives the
average number of future years that (x) will live

– Life expectancy is the average duration NOT the

average age
⚫ Eg: The life expectancy at age 50 is 31.2. This means that a
person at age 50 can expect to live to age 81.2

8
 1 𝑙𝑥 − 𝑙𝑥+𝑛
Adding to (1) gives
2 𝑙𝑥
𝑛𝑞𝑥
Life expectancy cont’d

⚫ The quantity:
𝑛 𝑛
𝑙𝑥+𝑘
෍ = ෍ 𝑘𝑝𝑥 = 𝑒𝑥:𝑛|
ത (1)
𝑙𝑥
𝑘=1 𝑘=1
(Curtate n-year temporary life expectancy at age x)
(It gives us the expected complete number of years lived
over the next n years by people now age x)
𝑛
1 𝑜
෍ ( 𝑘𝑝𝑥 ) + 𝑛𝑞𝑥 = 𝑒𝑥:𝑛|
ത
2
𝑘=1
9 (Complete n year temporary life expectancy at age x)
 Active learning

⚫ You are given that q60 = 0.2, q61 = 0.25, q62 =

0.25, q63 = 0.30, q64 = 0.40.
a) Find lx for ages 60 to 65, beginning with l60 = 1000.
b) Find the probabilities of the following
i. (61) will die between the ages of 62 and 64
ii. (62) will live to age 65
c) Given e65 = 0.80, find ex for x = 60 to 64

10
 What are the major factors affecting future mortality?
Why do you think women generally live longer than men?

Choice of life tables

⚫ Selecting of an appropriate life table for a given

use is an important actuarial task
– Life tables for men and women
– Life tables for smokers and non-smokers
– Individual and group insurance contracts
⚫ Life tables produced for the general population
from census data
Unsuitable for insurances purpose!
Effect of these factors are handled by producing different
11
life tables
 Choice of life tables cont’d

⚫ Multiples of standard mortality

– Construction of different life tables from a standard
table
⚫ Example
– For a risk of a certain type, the mortality is 150%
(i.e., mortality is 150% of standard mortality)

12
 (Actuarial device used to denote “waiting
period”)

Standard notation

𝑛|𝑘 𝑞𝑥 Probability that a (x) will die between age x+n and x+n+k

(:, the person will wait n years and die in the following k years)
𝑛|𝑞𝑥 denote 𝑛|1𝑞𝑥

13
 Sample life table

⚫ The parametric form:

1 − exp(−0.00005 1.09 𝑥 , 𝑥 = 0, 1, . . . , 118)
𝑞𝑥 =
1, 𝑥 = 119

14
 Active learning

⚫ Suppose lx = 100-x, x = 0, 1, . . . , 100

Find expressions for
a) npx
b) nqx
c) The probability that (x) will die between the
ages of x+n and x+n+k
⚫ Suppose that out of a typical group of 100 people age 70,
10 will die in the first year, 15 will die in the second year,
and 20 will die in the third year. Calculate q70, q71, q72 and
15 3p70
 Active learning

⚫ Your given that e60 = 17, 10p50 = 0.80, and

that the 10-year curtate temporary life
expectancy at age 50 is 9.2. Find e50

16
 If you were to choose how many years you want to live,
how many will you choose?

Life annuities

Week 4

17
 Life annuities

⚫ Objective
– Compute premium for life annuity

⚫ Purpose
– To be able to assign the right premium for an applicant
of an annuity as an employee of a life office

18
 Road map

⚫ Introduction
⚫ Calculating annuity premiums
⚫ The interest and survivorship discount function
⚫ Guaranteed payments
⚫ Deferred annuities with annual premiums
⚫ Some practical considerations
⚫ Standard notation and terminology
⚫ Spreadsheet calculations
19
 Introduction

⚫ Life annuities are means of insuring against

living too long
– It is a contract between an insurer and the
annuitant (the person whose life the contract
depends) which provides the following:
In return for the payment by the annuitant of prescribed premiums,
the insurer will provide annuity benefits (i.e. a sequence of payments)
of prescribed amounts in prescribed times
The annuitant must be alive to receive the annuity benefits!
Each annuitant receives a survivorship earnings!
20
 We compute annuity premiums as a function of age

Calculating annuity premiums

⚫ Fix an appropriate life table and a discount

function v
⚫ Consider a contract sold on the life of (x)
⚫ Let the benefits payments be made yearly
𝑐𝑘 , the amount of benefit paid at time k
⚫ The contract can be described by the cashflow
vector
𝑐 = 𝑐0 , 𝑐1 , . . . , 𝑐𝜔−𝑥−1
21 (Annuity benefit vector)
 Calculating annuity premiums
cont’d

⚫ Suppose that benefits are to be purchased by a

single premium paid at the beginning of the contract
at age x
Goal: compute the premium the annuitant must pay
Consider the case: 𝑐 = 𝑒 𝑘 (Pure endowment)

(An annuity consisting of a single benefit payment

of 1 to be made at time k if (x) is alive)
Note
Final cashflow is made at age (ω -1),
22 the last age at which anyone is living
 What is the total premium collected at time 0?
Calculating annuity premiums
cont’d
⚫ Let E be the single premium that should be paid to
provide the pure endowment
⚫ Suppose lx people each age x buy such a contract
𝐸𝑙𝑥 which accumulate to 𝑙𝑥 𝐸𝑣(𝑘, 0) at time k
At time k, there will be 𝑙𝑥+𝑘 survivors and each must
receive 1 unit
𝑙𝑥+𝑘 = 𝑙𝑥 𝐸𝑣(𝑘, 0)
𝑙𝑥+𝑘 1
𝐸= = 𝑣 0, 𝑘 𝑘𝑝𝑥
𝑙𝑥 𝑣(𝑘, 0)
23 𝐸 = 𝑣 𝑘 𝑘𝑝𝑥
 Calculating annuity premiums
cont’d

⚫ General case:
𝑎ሷ 𝑥 (𝑐) single premium for a life annuity on (x) with
benefit vector c
Premium for such an endowment is just:
𝑐𝑘 𝑣(𝑘) 𝑘𝑝𝑥
Hence total premium:
𝜔−𝑥−1

𝑎ሷ 𝑥 𝑐 = ෍ 𝑐𝑘 𝑣(𝑘) 𝑘𝑝𝑥
𝑘=0
24
 3.28
Example

⚫ A temporary life annuity on (50) provides for 1

payable at 50, 2 payable at age 51, 3 payable
at age 52, and 4 payable at age 53. Suppose
q50 = 0.1, q51 = 0.2, q52 = 0.25. The interest rate
is 50% for the first year and 100% thereafter.
Find the single premium

25
 Active learning

⚫ You are given q60 = 0.20, q61 = 0.25, q62 = 0.40,

q63 = 0.50. The interest rate is a constant 5%
for the first 2 years, and 7% after that. A 5-year
life annuity on (60) provides for payments of
100(1+k) at time k, where k = 0, 1, 2, 3, 4.
Find the present value

26
 Calculating annuity premiums
cont’d

⚫ Classification of annuities
Temporary life annuity
Life annuity Whole life annuity
Deferred annuity

The benefit vector for a deferred annuity will be:

𝑐 = (0𝑘 , 𝑑)
Duration k is called deferred duration
27
 The interest and survivorship discount
function

⚫ The basic definition

⚫ Relation between 𝑦𝑥 for various values of 𝑥
⚫ Tontines
⚫ Guaranteed payments

We examine each point separately!

28
 The basic definition

⚫ Define: 𝑦𝑥 (𝑛) = 𝜐(𝑛) 𝑛𝑝𝑥

Extend to a two-variable function
𝑦𝑥 (𝑛)
𝑦𝑥 𝑘, 𝑛 = , ∀, 𝑘, 𝑛 ∈ ℤ+
𝑦𝑥 (𝑘)
(Interest and survivorship discount function)

Show that 𝑦𝑥 (𝑘, 𝑛) is a discount function

29
 𝑣(𝑛, 0)
The basic definition cont’d

⚫ Note:
– The amount at time n resulting from an investment
of 1 at time 0 (by
is: this definition)
𝑣(𝑛, 0)
𝑦𝑥 𝑛, 0 = > 𝑣(𝑛, 0)
𝑛𝑝𝑥

Amount resulting from interest only

The fact that 𝑦𝑥 (𝑛, 0) exceeds 𝑣(𝑛, 0) reflects the
extra amount due to survivorship
30
 Note
𝑦𝑥 𝑘, 𝑘 + 1 = 𝑣(k, k + 1)𝑝𝑥+𝑘

The basic definition cont’d

⚫ It follows that
𝑎ሷ 𝑐 = 𝑎(𝑐,
ሷ 𝑦𝑥 )
(PV of all payments wrt to the discount function 𝑦𝑥 )

Call 𝑎(𝑐)
ሷ the net single premium or present values

Notation
The vector 1ω-x is written 1 when using 𝑦𝑥

Single premium for a whole life annuity on (x)

𝑎ሷ 𝑥 = 𝑎ሷ 𝑥 (1∞ ) paying 1 per year for life beginning at time 0
31
 Example

⚫ A temporary life annuity on (50) provides for 1

payable at 50, 2 payable at age 51, 3 payable
at age 52, and 4 payable at age 53. Suppose
q50 = 0.1, q51 = 0.2, q52 = 0.25. The interest rate
is 50% for the first year and 100% thereafter.
Find the single premium

3.28
32
 Active learning

⚫ A temporary life annuity on (50) provides for

1 payable at 50, 2 payable at age 51, 3
payable at age 52, and 4 payable at age 53.
Suppose q50 = 0.1, q51 = 0.2, q52 = 0.25.
The interest rate is 50% for the first year
and 100% thereafter. Find
a) 𝑦50
b) 𝑎ሷ 50

33
 Relation between 𝑦𝑥 for various values
of x

⚫ Several interest and survivorship function,

one for each value of the initial age x
They are related in the following way:
𝑦𝑥 ∘ 𝑘 𝑛 = 𝑦𝑥 (𝑘, 𝑘 + 𝑛)
𝑦𝑥 (𝑘 + 𝑛) 𝑣(𝑘 + 𝑛) 𝑘+𝑛𝑝𝑥
= =
𝑦𝑥 (𝑘) 𝑣(𝑘) 𝑘𝑝𝑥
= 𝑣(𝑘, 𝑘 + 𝑛) 𝑛𝑝𝑥+𝑘 = 𝑣 ∘ 𝑘(𝑛) 𝑛𝑝𝑥+𝑘

34 𝑦𝑥 ∘ 𝑘 𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑤𝑖𝑡ℎ 𝜐 = 𝑦𝑥+𝑘 (𝑐𝑎𝑙𝑐𝑢𝑙𝑎𝑡𝑒𝑑 𝑤𝑖𝑡ℎ 𝜐 ∘ 𝑘)

 Relation between 𝑦𝑥 for various values
of x cont’d

⚫ If interest is constant
𝑦𝑥+𝑘 = 𝑦𝑥 ∘ 𝑘
In particular: 𝑦𝑥 = 𝑦0 ∘ 𝑥
(i.e. knowing the interest rate and survivorship function
for initial age 0 determines it for all initial ages) paying ck
Notation
PV(Life annuity on (𝑥 + 𝑘)) paying 𝑐𝑖
𝑎ሷ 𝑥 +𝑘 (𝑐)
at time 𝑖 and calculated wrt 𝑣 ∘ 𝑘
With constant interest rate, 𝑣 ∘ 𝑘 = 𝑣
35 𝑎ሷ 𝑥 +𝑘 𝑐 = 𝑎ሷ 𝑥+𝑘 (𝑐)
 ሷ ∘ 𝑘, 𝑣 ∘ 𝑘)
𝑉𝑎𝑙𝑘 𝑘𝑪 = 𝑎(𝑐 (2.28)
Relation between 𝑦𝑥 for various values
of x cont’d

From (2.28) 𝑣
𝑘
𝑉𝑎𝑙𝑘 𝑐 = 𝑎ሷ 𝑥+𝑘 (𝑐 ∘ 𝑘, 𝑣 ∘ 𝑘)
𝑘
we can write 𝑉𝑎𝑙𝑘 𝑐 = 𝑎ሷ 𝑥 +𝑘 (𝑐 ∘ 𝑘)

Annuity version of splitting identity:

𝑎ሷ 𝑥 𝑐 = 𝑎ሷ 𝑥 𝑘𝑐 + 𝑦𝑥 (𝑘)𝑎ሷ 𝑥 +𝑘 (𝑐 ∘ 𝑘)
Assume constant interest. Let c = 1∞ . Then kc = 1k and
c◦k = 1∞ 𝑙
𝑘 𝑥+𝑘
𝑎ሷ 𝑥 = 𝑎ሷ 𝑥 1𝑘 + 𝑣 𝑎ሷ 𝑥+𝑘 (1∞ )
➔
36 𝑙𝑥
 Relation between 𝑦𝑥 for various values
of x cont’d

𝑎ሷ 𝑥 𝑐 = 𝑎ሷ 𝑥 𝑘𝑐 + 𝑦𝑥 (𝑘)𝑎ሷ 𝑥 +𝑘 (𝑐 ∘ 𝑘) is applied to express the PV

of a deferred annuity, 𝑎ሷ 𝑥 𝑐 , 𝑐 = 0𝑘 ∘ 𝑑 in terms of the vector 𝑑

Choose 𝑘𝑐 = 0𝑘 and 𝑐∘𝑘 =𝑑

Then 𝑎ሷ 𝑥 𝑐 = 𝑦𝑥 (𝑘)𝑎ሷ 𝑥 +𝑘 (𝑑)

We illustrate the use of the bracket notation!

37
 𝑣(𝑘, 𝑘 + 𝑖)
Compare with 𝑎ሷ 60 14 = 3.33
𝜔−𝑥−1

𝑎ሷ 𝑥 +𝑘 𝑐 = ෍ 𝑐𝑖 𝑣 ∘ 𝑘(𝑖) 𝑖𝑝𝑥
Example 𝑖=0

⚫ Suppose that q60 = 0.05, q61 = 0.10, q62 = 0.15, i0

= i1 = 0.04 and ik = 0.08 for k  2. Calculate:
a) 𝑎ሷ 60 (14 )
𝜔−𝑥−1
b) 𝑎ሷ 59 +1 (14 )
𝑎ሷ 𝑐 = ෍ 𝑐 𝑣(𝑘, 𝑘 + 𝑖) 𝑝
𝑥 +𝑘 𝑖 𝑖 𝑥
c) 𝑎ሷ 58 +2 (14 ) 𝑖=0

𝑎ሷ 59 +1 14 = 3.27 the amount a person age (59) would

have to pay for a 1-unit, 4-year annuity if the purchase was
made at the end of 1 year
38
 Tontines

⚫ A scheme/plan whereby a group of

individuals all contribute to a fund, with the
provision that the last one living among the
group takes the entire amount

(Introduced by Lorenz Tonti in 1653)

What will be the motivation for participating in such a scheme?

39
 𝑁

𝑉𝑎𝑙𝑛 𝑐; 𝑣 = ෍ 𝑐𝑘 𝑣(𝑛, 𝑘)
𝑘=0
𝑦𝑥
Example 𝑦𝑥 (𝑛, 𝑘)

⚫ Suppose a group of people all age x contribute

1000 at the beginning of each year for 4 years.
At time 4, the survivors share equally in the
accumulated fund. Given the interest rate is a
constant 6% and that qx = 0.2, qx+1 = 0.3, qx+2 =
0.4 and qx+3 = 0.5, how much will each survivor
get at time 4? (Assume the mortality and
interest experience are as expected)

40
 Active learning

⚫ A group of individuals age 40 each invest

1000 in a fund earning interest at 5%. At the
end of 20 years the fund is divided equally
among the survivors. If 20p40 = 0.8, how much
does each get?

41
 Assignment 4

⚫ Ex. 3.5, 3.8, 4.4

⚫ Due on Wednesday March 30, 2022 at 5pm
⚫ Late submissions will not be accepted!

42