Contents

3 Life insurance policies

i 49
3.1 Discrete life insurances policies (DLIP) . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
hb
3.1.1 Level Benefit Discrete Whole Life Insurance (LBDWLI) . . . . . . . . . . . . . . 50
da

3.1.2 Level Benefit Discrete Term Life Insurance (LBDTLI) . . . . . . . . . . . . . . . 52

Ed

3.1.3 Pure Endowment Life Insurance (PELI) . . . . . . . . . . . . . . . . . . . . . . 54

3.1.4 Level Benefit Discrete Endowment Life Insurance (LBDELI) . . . . . . . . . . . 55
ed

3.1.5 Level Benefit Deferred Discrete Whole Life Insurance (LBDDWLI) . . . . . . . 58

m

3.1.6 Non–Level–Benefit Insurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

ha

3.1.7 m–thly life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

M

3.2 Continuous Life Insurance Policies (CLIP) . . . . . . . . . . . . . . . . . . . . . . . . . 64

3.2.1 Level Benefit Continuous Whole Life Insurance (LBCWLI) . . . . . . . . . . . . 65
f.
o

sa

3.2.2 Level Benefit Continuous Term Life Insurance (LBCTLI) . . . . . . . . . . . . . 68

Pr

u.

3.2.3 Pure Endowment Life Insurance (PELI) . . . . . . . . . . . . . . . . . . . . . . 69

ed

3.2.4 Level Benefit Continuous Endowment Life Insurance (LBCELI) . . . . . . . . . 69

u.

3.2.5 Level Benefit Deferred Continuous Whole Life Insurance (LBDCWLI) . . . . . . 70

I
ks

els
3.2.6 Non–Level–Benefit Insurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
@

3.3 Relations between Level–Benefit Policies . . . . . . . . . . . . . . . . . . . . . . . . . . 75

od
i
hb

3.3.1 Recursions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
lM
3.3.2 Relating m–thly and discrete (annual) insurances . . . . . . . . . . . . . . . . . 77
da

3.4 Sample Exam Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

ica
ed

at
m

m
he
at
lM
ia
ar
tu
Ac

48
 Chapter 3

Life insurance policies

i
hb
da

In this chapter we are dealing with present values, let us first review some notations and formulas
Ed

from financial mathematics that we will need. Let i be the interest rate. Then
i
ed

ˆ d= is the rate of discount.

1+i
m
ha

1
ˆ v= = 1 − d is the discounting rate. The parameter i, d, and v are related by the formula
M

1+i
d = iv.
f.
o

ˆ δ = ln(1 + i) is the force of interest or the continuously compounded interest rate corresponding
sa
Pr

to i. We have eδ = 1 + i, e−δ = v, and v t = e−δt .

u.
ed

ˆ a n is the present value of an n–year immediate certain annuity that pays 1 per year at the
u.

I
end of each year for n years. It can be written as
ks

els
@

od
X 1 − vn
i

an = vk = .
hb

k=1
i
lM
da

ica
ed

ˆ ä n is the present value of an n–year certain annuity–due that pays 1 per year at the beginning
at
m

of each year for n years. It can be written as

m
he

n−1
1 − vn 1 − vn
at

X
ä n = vk = = .
1−v d
lM

k=0
ia
ar

ˆ ā n is the present value of an n–year continuous certain annuity that pays at a rate of 1 per
tu

year continuously. Its formula is given by

Ac

Z n
−δs 1 − e−δn 1 − vn
ā n = e ds = = .
0 δ δ

3.1 Discrete life insurances policies (DLIP)

A discrete whole life insurance pays a benefit at the end of the year of death of the policyholder,
whenever it occurs. Throughout this section, we use bk to denote the benefit function, that is, the
amount of benefit as a function of Kx .

49
 50

Death benefit b1 b2 ··· ··· bKx bKx +1

Timeline
Future life time in years 0 1 2 ··· ··· Kx Tx Kx + 1
Kx +1
Present value: PV0 (b) v bKx +1 b1 b2 ··· ··· bKx bKx +1

A few important discrete life insurance policies are covered in this section. First, let us talk about
the simplest policy, level benefit whole life insurance.
The main questions we are particularly interested in are the expected value E [Z] and the variance
Var(Z) of Z. If Z = bKx +1 v Kx +1 then
∞ ∞
i
hb
 X X
E [Z] = E v Kx +1 bKx +1 = v k+1 bk+1 k| qx = v k+1 bk+1 k px qx+k

da

k=0 k=0
Ed

and the second moment of Z is given by

ed

∞ ∞
 2  2Kx +2 2  X 2k+2 2
X
v 2k+2 b2k+1 k px qx+k .
m

E Z =E v bKx +1 = v bk+1 k| qx =
ha

k=0 k=0
M
f.

3.1.1 Level Benefit Discrete Whole Life Insurance (LBDWLI)

o

sa
Pr

u.

For now, we focus on level benefit policies. A level benefit policy pays the same amount of benefit,
ed

regardless of the time at which the benefit is paid. Furthermore, to simplify calculations, we assume
u.

I
for now that the benefit is $1. The diagram below illustrates the mechanism of a unit–benefit discrete
ks

els
whole life insurance:
@

od
i

Death benefit 1 1 ··· ··· 1 1

hb

Timeline
lM
da

Future life time in years 0 1 2 ··· ··· Kx Tx Kx + 1

ica
ed

Present value: PV0 (b) v Kx +1 1 1 ··· ··· 1 1

at
m

We denote PV0 (1) present value random variable by

he

 Kx +1
1
at

Kx +1
Z=v = .
lM

1+i
ia

We shall use again Z to denote the present value random variable for a unit–benefit discrete insurance
ar

policy.
tu

The first contract we will discuss is a discrete whole life insurance. Discrete whole life insurance
Ac

on (x) pays a benefit at the end of the year of death of (x)’s death. Let us consider a discrete whole
life insurance of 1 on (x) that pays 1 at the end year of death of (x). Let Z denote the present value
of this discrete whole life insurance. The benefit function and the present value random variable are
given by
Benefit at the end of the year of death Present value of the benefit
bKx +1 = 1 for all Tx ≥ 0 Z = v Kx +1 for all Tx ≥ 0
The expected value of Z is obtained by summing v Kx +1 , over the p.m.f. of Kx
∞ ∞
 Kx +1  X k+1
X
E [Z] = E v = v k| qx = v k+1 k px qx+k =: Ax .
k=0 k=0
 51

Whenever we have a limiting age ω we write

 Kx +1  ω−x−1
X
k+1
ω−x−1
X
E [Z] = E v = v k| qx = v k+1 k px qx+k =: Ax
k=0 k=0

We call E [Z] = Ax the Expected Present Value (EPV) or more commonly the Actuarial Present
Value (APV) of future benefits. This means that Ax is APV for a discrete unit–benefit whole life
insurance on (x). The x indicates the age of the policyholder at the beginning of the contract.

Definition 3.1.1 We say that E [Z] = Ax is the net single premium for the policy. By net we mean
that the premium is not loaded with any expenses, and by single we mean that the premium is paid as
bi
a single lump sum at the inception (issuance date) of the contract.
h
da

The variance of Z is given by definition as

Ed

Var(Z) = E Z 2 − (E [Z])2 = 2 Ax − (Ax )2

 
ed

2
where Ax is calculated as in Ax by replacing v with v 2 .
m

Example 3.1.1 You are given that µx = µ for all x ≥ 0. Let Z be the present value random variable
ha

for a whole life insurance with a level benefit of $1 payable at the end of year of death.
M

(a) Derive expressions for Ax and Var(Z) in terms of µ and the effective interest i.
.

(b) Assume that µ = 0.04 and i = 0.05. Find the probability that the net single premium is insufficient
of

.sa

to cover the benefit.

Pr

u
ed

Solution: (a) We can calculate the first two moments of Z as follows:

u.

I
∞ ∞ ∞

els
X X
X
k
ks

k −kµ −µ −µ
k+1
ve−µ


Ax = v k px qx+k = v v e 1−e =v 1−e
@

od
k=0 k=0 k=0
bi

−µ
1 1−e q

lM
= v 1 − e−µ (where q = 1 − e−µ )


= =
ah

1 − ve−µ 1+i−e −µ q+i

ica
d
ed

and similarly
at
m

∞ ∞ ∞
m

X X
2k −kµ −µ −µ

X
k
2 2(k+1) 2 2
v 2 e−µ


Ax = v k px qx+k = v v e 1−e =v 1−e
he

k=0 k=0 k=0

at

1 1 − e−µ q
= v2 1 − e−µ (where p = e−µ ).


= =
lM

2
1−v e −µ 2
(1 + i) − e −µ (1 + i)2 − p
ia

Therefore the variance of Z is given by

r
ua

 2
q q
Var(Z) = E Z 2 − (E [Z])2 =
 
− .
t
Ac

(1 + i)2 − p q+i
(b) The required probability is P (Z > Ax ) where for µ = 0.04 and i = 0.05. Z = v Kx +1 and Ax =
1−e−0.04
1−e−0.04 +0.05
= 0.43953 with v = 0.95238. Hence

P (Z > Ax ) = P v Kx +1 > 0.43953 = P ((Kx + 1) ln(0.95238) > ln (0.43953))

 
ln (0.43953)
= P Kx + 1 < = 16.848 = P (Kx < 15.848)
ln(0.95238)
= P (Kx ≤ 15) = P (Tx < 16) = 16 qx = 1 − e−16×0.04 = 0.47271.
 52

Remark 3.1.1 In practice, insurance companies sell policies for other amounts. Consider a discrete
whole life insurance with a benefit of S dollars payable at the end of the year of death. The present
value random variable for this policy is SZ. The actuarial present value of this policy is given by

E [SZ] = SAx and Var(SZ) = S 2 2 Ax − (Ax )2

Therefore insurance companies may use the following formulas for the charged premiums to policyholders

Safety Loading premium ΠSL (θ) = (1 + θ)E[Z], θ ≥ 0

σ 2 –Loading premium aVar(Z), a ≥ 0
ΠVar (a) = E[Z] + p
σ–Loading premium
i Πsd (b) = E[Z] + b Var(Z), b ≥ 0
hb
da

Exercise 3.1.1 Z is the present–value random variable for a whole life insurance of b payable at the
Ed

end of the year of death of (x). You are given:

(i) i = 0.04, (ii) µx = 0.06 for x > 0.
ed

(ii) The net single premium for this insurance is equal to Var(Z). Calculate the benefit b.
m
ha

Solution: Let Z denotes the present value random variable for a whole life insurance with level benefit
M

b. From the Example 3.1.1 we have

f.

q 1 − e−0.06
o

sa
E [Z] = b Ax = b =b = 0.5928b
Pr

q+i 1 − e−0.06 + 0.04

u.
ed

and
1 − e−0.06
u.

I
E Z 2 = b2 2 Ax = b2 2
= 0.41646b2
 
= b
ks

(1.04)2 − e−0.06

els
(1 + i)2 − p
@

od
therefore the variance of Z is given by
i
hb

Var(Z) = E Z 2 − (E [Z])2 = 0.065048b2 .

 
lM
da

ica
ed

Remember that the net single premium for this insurance E [Z] is equal to Var(Z). It follows that
at
m

0.5928
0.065048b2 = 0.5928b, then b = = 9.1133
he

0.065048
at
lM
ia

3.1.2 Level Benefit Discrete Term Life Insurance (LBDTLI)

ar

An n–year term life insurance pays a benefit at the end of the year of death only if death occurs in the
tu

following n years. Because it does not cover the entire lifetime, it is cheaper than a discrete whole
Ac

life insurance with the same amount of benefit.

From now, we focus on level benefit n–year term life insurances. Further, to standardize notation,
we assume that the benefit amount is $1. The payout from a unit–benefit n–year term life insurance
is illustrated in the following diagram.

Death benefit 1 1 ··· 1 ··· 1 ··· 0 ···

Timeline
Future life time in years 0 1 2 ··· Kx ··· n ··· Kx ···
Kx +1
Present value: PV0 (1) v or 0 ··· ··· ··· 1 ··· 1 ··· 0 ···
 53

The benefit function and the present value random variable are given by
Benefit at
 the end of the year of death Present
 value of the benefit
Kx +1
1 if Kx < n v if if Kx < n
bKx +1 = Z=
0 if Kx ≥ n. 0 if if Kx ≥ n.

The actuarial present value, i.e., E [Z], can be calculated as

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

k=0 k=0

and we have E [Z 2 ] = i 2 1
Ax:n where 2 1
Ax:n 1
means that Ax:n is evaluated for by replacing v with v 2 .
hb
Consequently
da

2
Var(Z) = E Z 2 − (E [Z])2 = 2
 
1
Ax:n 1
− Ax:n .
Ed

In this symbol, the 1 above x indicates that the policy is an n–year term life insurance. (It does not
carry any numerical meaning.) The subscript n indicates that coverage is provided for at most n
ed

years.
m
ha

Remark 3.1.2 For non–level benefit n–year term insurance with death benefit bk , for k = 1, 2, . . . , n
M

the NSP or APV of the insurance is given by

f.

n−1 n−1
o

sa
X X
k+1
E [Z] = v bk+1 k| qx = v k+1 bk+1 k px qx+k .
Pr

u.

k=0 k=0
ed

There is no actuarial symbol.

u.

I
ks

els
Example 3.1.2 A Woman, age 36, purchases a 3–year term insurance with benefits payable at the
@

end of the year of death. The benefit is given by the formula: bk = 5000 × (1.04)k for k = 1, 2, 3

od
i
hb

Mortality is described in the following table:

lM
da

Age 35 36 37 38 39 40
ica
ed

ℓx 60, 000 50, 000 47, 500 45, 000 42, 500 40, 000
at
m

Calculate the net single premium for this insurance when i = 0.05 and i = 0.04.
m
he

Solution: The net single premium NSP is given by:

at
lM

3−1
X
NSP = v k+1 bk+1 k| q36 = vb1 q36 + v 2 b2 p36 q37 + v 3 b3 2 p36 q38
ia

k=0
ar

ℓ36 − ℓ37 ℓ37 ℓ37 − ℓ38 ℓ38 ℓ38 − ℓ39

= vb1 + v 2 b2 + v 3 b3
tu

ℓ36 ℓ36 ℓ37 ℓ36 ℓ38

Ac

1
vb1 (ℓ36 − ℓ37 ) + v 2 b2 (ℓ37 − ℓ38 ) + v 3 b3 (ℓ38 − ℓ39 )


=
ℓ36
 2  3 !
5000 1.04 1.04 1.04
= (ℓ36 − ℓ37 ) + (ℓ37 − ℓ38 ) + (ℓ38 − ℓ39 )
ℓ36 1.05 1.05 1.05
 2  3 !
5000 1.04 1.04 1.04
= (50000 − 47500) + (47500 − 45000) + (45000 − 42500)
50000 1.05 1.05 1.05
= 735.8
The case i = 0.04 is easy.
 54

3.1.3 Pure Endowment Life Insurance (PELI)

An n–year pure endowment provides a payment at the end of n years if the policyholder survives, but
makes no payment if the policyholder dies within n years. As before, we assume the benefit amount
is $1. The payout from a unit benefit n–year pure endowment is illustrated in the diagram below.
Survival benefit 0 0 ··· 0 ··· 1 ··· 0 ···
Timeline
Future life time in years 0 1 2 ··· Kx ··· n ··· Kx ···
Present value: PV0 (1) 0 or v n ··· ··· 0 1 ··· 0 ···
Unlike the previous two policies, the benefit from an n–year pure endowment is paid at time n (instead
of time Kx + 1). Hence, the appropriate discount factor is v n , and benefit function and the present
i
hb
value random variable are given by
da

Benefit at
 the end of the year of death Present
 value of the benefit
Ed

0 if Kx < n 0 if Kx < n
bKx +1 = Z=
1 if Kx = n. v n if Kx ≥ n.
ed
m

The actuarial present value, i.e., E [Z], can be calculated as

ha

E [Z] = v n P (Kx ≥ n) = v n n px = Ax: n1 = n Ex .

M

and we have E [Z 2 ] = Ax: n1 = v 2n n px thus

2
f.

2
Var(Z) = 2 Ax: n1 − Ax: n1
o

sa
Pr

u.

= v 2n n px − v 2n ( n px )2 = v 2n n px (1 − n px ) = v 2n n px n qx .
ed

1
In this symbol, the above n indicates that the policy is a pure endowment.
u.

I
Example 3.1.3 You are given the following excerpt from a TWO year select–and–ultimate mortality
ks

els
table:
@

od
[x] ℓ[x] ℓ[x]+1 ℓx+2 x + 2
i
hb

30 10, 000 9, 000 8, 000 32

lM
da

31 9, 500 8, 500 7, 500 33

ica
ed

32 9, 200 8, 100 7, 000 34

at
m

33 8, 700 7, 500 6, 300 35

m

34 8, 000 6, 600 5, 200 36

he

You are also given that a 4–year pure endowment for 250, 000 SAR issued at age 30 to a life selected
at

at age 30 has a net single premium of 50, 000 SAR. Assume a constant rate of interest. Determine the
lM

net single premium for a 3–year pure endowment for 250, 000 SAR issued at age 31 to a life selected
at age 31.
ia

1
ar

Solution: The NSP of this policy is given by 250000 A[31]: 3 = 250000 3 E[31] where
tu

1 ℓ[31]+3 ℓ34 70
A[31]: 3 = 3 E[31] = v 3 3 p[31] = v 3 = v3 = v3 .
Ac

ℓ[31] ℓ[31] 95
Now, let us back out the discount factor. We have
ℓ[30]+4 7000
50000 = 250000 v 4 ⇐⇒ 1 = 5v 4 = 0.7 × 5v 4
ℓ[30] 10000
1 0.25
which gives v = ( 3.5 ) = 0.73111.
Therefore the Net Single Premium for the 3–year pure endowment is .
70
250000 3 E[31] = 250000 (0.73111)3 = 71988.
95
 55

3.1.4 Level Benefit Discrete Endowment Life Insurance (LBDELI)

An n–year endowment insurance provides an amount to be paid at the moment of death if death
occurs in the next n years or at the end of year n if the policyholder survives to that time. As before,
to standardize notation, we assume that the benefit amount is $1. The payout from a unit–benefit
n–year endowment insurance is illustrated in the diagram below.

Death benefit 1 1 ··· 1 ··· 1 ··· 0 ···

Survival benefit 1
Timeline
Future life time in years
i 0 1 2 ··· Kx ··· n ··· Kx ···
hb
Present value: PV0 (1) v Kx +1 or v n ··· ··· ··· 1 ··· 1 ··· 0 ···
da

The benefit function and the present value random variable are given by
Ed

Benefit at
 the end of the year of death Present
 value of the benefit
ed

Kx +1
1 if Kx < n v if Kx < n
bKx +1 = Z=
m

n
1 if Kx = n and = 0 if Kx > n. v if Kx ≥ n
ha
M

Remark 3.1.3 By comparing the previous three diagrams, one can see that an n–year endowment
f.

insurance is simply a combination of an n–year term insurance and an n–year pure endowment. It
o

sa
Pr

follows that the actuarial present value, i.e., E [Z] for an n–year endowment insurance can be expressed
u.

as
ed

n−1
X
E [Z] = v k+1 k| qx + v n n px = Ax:n
1 + Ax: n1 =: Ax:n
u.

I
ks

els
k=0
@

od
i

Moreover E [Z 2 ] = 2
Ax:n where 2
Ax:n means that Ax:n is evaluated for v 2 . Consequently
hb

lM
da

2
Var(Z) = E Z 2 − (E [Z])2 = 2 Ax:n − Ax:n .
 
ica
ed

at
m

Remark 3.1.4 For non–level benefit n–year endowment insurance with death benefit bk , for k =
he

1, 2, . . . , n and survival benefit S, the NSP or APV of the insurance is given by

at

n−1 n−1
lM

X X
k+1
E [Z] = v bk+1 k| qx + S n Ex = v k+1 bk+1 k px qx+k + S n Ex .
ia

k=0 k=0
ar

There is no actuarial symbol.

tu
Ac

Example 3.1.4 You are given that µx = µ for all x ≥ 0. (a) Derive an expression for Ax:n in terms
n−m+1
of µ and i. (b) Assume that µ = 0.04 and i = 0.05 (Hint nk=m ak = am 1−a1−a ). Calculate A30:5 . .
P

Solution:
(a) We have
n−1
X n−1
X
Ax: n1 k+1
v k+1 e−kµ 1 − e−µ + v n e−nµ


Ax:n = 1
Ax:n + = v k px qx+k + n Ex =
k=0 k=0
n−1
X
k
1 − (ve−µ )n
= v 1 − e−µ ve−µ + v n e−nµ = v 1 − e−µ + v n e−nµ .


k=0
1 − ve−µ
 56

(b)

1 − (ve−µ )5
A30:5 . = v 1 − e−µ + v 5 e−5µ
1 − ve−µ
1 −0.04 5 5
−0.04 1 − ( 1.05 e

1 ) 1
e−5×0.04 = 0.79907


= 1−e 1 +
1.05 1 − 1.05 e−0.04 1.05

Example 3.1.5 Ismail at age 30, wants to buy a 3–year endowment insurance, with a 40, 000 SAR
benefit payable at the end of the year of death. Determine the net single premium for this insurance
assuming that Ismail is subject to a constant force of mortality, µx = 0.08 and a constant force of
i
hb
interest δ = 0.04.
da
Ed

Solution: The net single premium is NSP = 40000 A30:3 where

ed

1
A30:3 = A30:3 + 3 E30 = v q30 + v 2 p30 q31 + v 3 2 p30 q32 + v 3 3 p30
m

= v q30 + v 2 p30 q31 + v 3 2 p30 ( q32 + p32 ) = v q30 + v 2 p30 q31 + v 3 2 p30
ha

= e−0.04 1 − e−0.08 + e−0.04×2 e−0.08 1 − e−0.08 + e−0.04×3 e−0.08×2

M

= 0.073869 + 0.065516 + 0.75578

f.
o

sa

therefore NSP = 40000(0.89517) = 35807.

Pr

u.

If µ changes and δ = 0.04 , we get A30:3 (µ) = e−0.04 (1 − e−µ ) + e−0.04×2 e−µ (1 − e−µ ) + e−0.04×3 e−2µ
ed
u.

I
ks

els
@

od
i
hb

lM
da

ica
ed

at
m

m
he
at
lM
ia
ar
tu
Ac

Figure 3.1: This figure shows the variation of A30:3 (µ) in term of the force of mortality in the range
µ ∈ (0, 1).
 57

If δ changes and µ = 0.08, we get A30:3 (δ) = e−δ (1 − e−0.08 ) + e−2δ e−0.08 (1 − e−0.08 ) + e−3δ e−2×0.08

h bi
da
Ed
ed
m
ha
M
.
of

.sa
Pr

Figure 3.2: This figure shows the variation of A30:3 (δ) in term of the force of interest in the range
ed

δ ∈ (0, 1).
u.

I
els
ks

When both δ and µ change, we get A30:3 (µ, δ) = e−δ (1 − e−µ ) + e−2δ e−µ (1 − e−µ ) + e−3δ e−2µ
@

od
bi

lM
ah

ica
d
ed

at
m

m
he
at
lM
r ia
t ua
Ac

Figure 3.3: This figure shows the variation of A30:3 (µ, δ) in term of the force of mortality and the force
of interest in the range (µ, δ) ∈ (0, 8) × (0, 1).
 58

Example 3.1.6 For a special 3–year endowment insurance on (x), you are given the following death
probabilities and death benefits, payable at the end of the year of death:

year k bk qx+k−1
1 30 0.02
2 35 0.04
3 40 NA

The survival benefit is equal to b3 . Calculate the actuarial present value of this insurance for i = 4%.

Solution: The actuarial present value or APV(FB)0 can be calculated as follows

i
hb
APV(FB)0 = 30v qx + 35v 2 px qx+1 + 40v 3 2 px qx+2 + 40v 3 3 px
da

= 30v qx + 35v 2 px qx+1 + 40v 3 px px+1 ( qx+2 + px+2 )

Ed

= 30v qx + 35v 2 (1 − qx ) qx+1 + 40v 3 (1 − qx ) (1 − qx+1 )

ed

30 30 40
= (0.02) + (0.98) (0.04) + (0.98) (0.96)
m

1.04 (1.04)2 (1.04)3

ha

= 35.119
M
f.
o

sa
Pr

Exercise 3.1.2 For a special 3–year endowment insurance on (x), you are given the following death
u.

probabilities and death benefits, payable at the end of the year of death:
ed
u.

year k bk qx+k−1

I
ks

els
1 30 0.02
@

2 35 0.04

od
i
hb

3 40 0.06
lM
da

The survival benefit is equal to b3 + 20. Calculate the actuarial present value of this insurance for
ica
ed

i = 4%.
at
m

3.1.5 Level Benefit Deferred Discrete Whole Life Insurance (LBDDWLI)

he
at

An n–year deferred discrete whole life insurance pays a benefit at the end of the year of death if
lM

the policyholder has lived at least n years. As before, for notational convenience, we assume that the
benefit amount is $1. The payout from a unit–benefit n–year deferred whole life insurance is illustrated
ia

in the diagram below.

ar
tu

Death benefit 0 0 ··· 0 ··· 1 ··· 1 ···

Ac

Timeline
Future life time in years 0 1 2 ··· Kx ··· n+1 ··· Kx · · ·
Kx +1
Present value: PV0 (1) v or 0 ··· ··· ··· 0 ··· 1 ··· 1 ···

The benefit function and the present value random variable are given by

Benefit at
 the end of the year of death Present
 value of the benefit
0 if Kx < n 0 if Kx < n
bKx +1 = Z= Kx +1
1 if Kx ≥ n. v if Kx ≥ n.
 59

The actuarial present value, i.e., E [Z], can be calculated as

∞
X
E [Z] = v k+1 k px qx+k = n| Ax
k=n

The subscript n| on the left–hand side of the symbol indicates that the coverage is deferred by n
years. Similarly E [Z 2 ] = 2 n| Ax and

2
Var(Z) = 2 n| Ax − n| Ax .

Actuarial notation for standard types of discrete insurance

i
hb
Name Present value r.v. Symbol APV or EPV
da

 Kx +1
Ed

1
Whole life insurance v Kx +1 = 1+i
Ax
ed

v Kx +1 if Kx < n

n–year term life insurance 1
Ax:n
m

0 if Kx ≥ n.
ha

0 if Kx < n 1
n–year pure endowment insurance Ax: n = n Ex = v n n px
M

n
 K +1 if Kx ≥ n.
v
v x if Kx < n
f.

n–year endowment insurance n Ax:n

v if Kx ≥ n.
o

sa
Pr


0 if Kx < n
u.

n–year deferred whole life insurance Kx +1 if K ≥ n. n| Ax

v
ed

 x
0 if K x < n
u.

 n+m−1

I
K +1 1 v k+1
P
n–year deferred m–year term insurance v x if n ≤ Kx < n + m n| Ax:m = k| qx
ks

els

0 if Kx ≥ n + m. k=n
@

od
i
hb

lM
da

3.1.6 Non–Level–Benefit Insurances

ica
ed

Annually increasing discrete whole life insurance

at
m

Now, let us consider insurance policies which have non–level benefits. First, we consider a whole life
he

insurance with a benefit that increases annually with time. The benefit function and the present value
at

random variable are given by

lM

Benefit at the end of the year of death Present value of the benefit
Z = (Kx + 1) v Kx +1 for all Tx ≥ 0
ia

bKx +1 = Kx + 1 for all Tx ≥ 0

ar

The actuarial present value of future benefits is given by

tu
Ac

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

The I in the symbol indicates that the policy has an increasing benefit. But for the second moment
and the variance there is no symbol.
∞
 2 X
E Z = (k + 1)2 v 2k+2 k px qx+k
k=0

and should be calculated directly.

 60

Example 3.1.7 For a discretely increasing whole life insurance on (x), you are given:
(i) The force of mortality is constant. (ii) i = 4%. (iii) 2 Ax = 0.25.
Calculate (IA)x .

Solution: By definition
∞ ∞
X
−µ

X
k
(IA)x = (k + 1) v k+1
k px qx+k = v 1 − e (k + 1) ve−µ
k=0 k=0
∞ ∞
!′
k+1 ′
X
X
−µ
= v 1 − e−µ xk+1



= v 1−e x x=ve−µ
h bi k=0
′
k=0 x=ve−µ
−µ

x v (1 − e )
= v 1 − e−µ


da

=
1−x x=ve−µ (1 − ve−µ )2
Ed

To find numerical value with need µ. But under CFM we have

ed

q 1 − e−µ
m

2
Ax = = = 0.25
(1 + i)2 − p (1.04)2 − e−µ
ha
M

1
which gives µ = 0.02758. So with v = 1.04
= 0.96154,
.

v (1 − e−µ ) 0.96154 (1 − e−0.02758 )

of

.sa
(IA)x = = = 6.26461.
Pr

(1 − ve−µ )2 (1 − 0.96154e−0.02758 )2
u
ed
u.

I
Remark 3.1.5 Similarly, we can define other non–level benefit insurance policies, for example, a

els
ks

annually increasing n–year term life insurance and a annually increasing n–year endowment insurance.
@

od
We can also prescribe a decreasing benefit function to create policies such as a decreasing n–year term
bi

lM
life insurance.
ah

ica
d

The following table summarizes the formulas for various discrete non–level–benefit insurances.
ed

at
m

Non–Level–Benefit Insurances (discrete)

m

Policy Actuarial Present Value

he

Notation formula
at
lM

∞
(k + 1) v k+1 k px qx+k
P
Annually increasing discrete whole life insurance (IA)x
k=0
r ia
ua

n−1
t

(k + 1) v k+1 k px qx+k
1
P
Annually increasing discrete n–year term (IA)x:n
Ac

k=0

Annually increasing discrete n–year endowment (IA)x:n 1

(IA)x:n + n Ax: n1

n−1
(n − k) v k+1 k px qx+k
1
P
Annually decreasing discrete n–year term (DA)x:n
k=0
 61

Example 3.1.8 Assume i = 0.06. You are given the following extract from a life table:

x 70 71 72 73 74 75
ℓx 10169 8272 6618 5204 4019 3047
dx 1897 1654 1414 1185 972 780

1. Calculate A70:4

2. Calculate (IA)70:4

3. Calculate the standard deviation of the present value of a 4–year term life insurance, issued to
i
hb
(70) , with sum insured $10000 payable at the end of the year of death.
da

4. Calculate the probability that the present value (PV) of the term insurance in the question 3. is
Ed

greater than 8500 .

ed

Solution:
m
ha

1.
M

3
f.

X
A70:4 = 1
A70:4 + 4 E70 = v k+1 k| q70 + v 4 4 p70
o

sa
Pr

k=0
u.

3
ed

X d70+k ℓ74
= v k+1 + v4 = 0.52980 + 0.31305 = 0.84285.
u.

ℓ70 ℓ70

I
k=0
ks

els
@

od
i
hb

2. Note that by the time when the endowment benefit is paid, the benefit amount will have increased
1
to 4 thus (IA)70:4 = (IA)70:4 lM
+ 4 4 E70 . First, we compute the increasing term life insurance
da

component:
ica
ed

at
m

3 3
X X d70+k
1
(k + 1)v k+1 k| q70 = (k + 1)v k+1
m

(IA)70:4 = = 1.18497.
ℓ
he

70
k=0 k=0
at

Hence
lM

(IA)70:4 = 1.18497 + 4 × 0.31305 = 2.43717.

ia
ar
tu

3. Let Z be the present value random variable for a 4–year term life insurance of $1 issued to (70).
Ac

We have
3

2 X
Var(Z) = 2 1
A70:4 − 1
A70:4 = v 2(k+1) k| q70 − (0.52980)2 = 0.18531
k=0

Hence, the standard deviation of the present value of a 4–year term life insurance, issued to
(70), with sum insured $10000 payable at the end of the year of death is given by
√
10000 0.18531 = 4304.8
 62

4.

P 10000v K70 +1 > 8500 = P ((K70 + 1) ln(v) > ln(0.85))

 
ln(0.85)
= P K70 < −1 = P (K70 < 1.7891)
ln(v)
= P (K70 = 0) + P (K70 = 1)
d70 + d71
= = 0.34920.
ℓ70

i
An example of geometrically increasing life insurance:
hb
da

Example 3.1.9 For a 20–year term insurance on a life currently age 40: (i) q40+k = 0.01, k ≥ 0,
Ed

(ii) if death occurs in the interval (k, k + 1], the benefit is 2000 (1.03)k . (iii) The benefit is paid at the
end of the year of death. Calculate the actuarial present value of the insurance when i = 6%.
ed
m

Solution: The APV of the insurance, which well be denoted A, is

ha
M

19 19
X X 1
A = v k+1
bk+1 k p40 q40+k = 2000 k+1
(1.03)k (0.99)k (0.01)
f.

k=0 k=0
(1.06)
o

sa
Pr

19  k 19
20 X 1.03 20
u.

X
= 0.99 = (0.96198)k
ed

1.06 k=0 1.06 1.06 k=0

u.

20

I
20 1 − (0.96198)
ks

= = 267.69

els
1.06 1 − 0.96198
@

od
i
hb

lM
da

3.1.7 m–thly life insurance

ica
ed

at
m

In addition to the concept of an insurance payable at the end of the year of death, there is the concept
m

of an insurance payable at the end of a fraction of the year of death. An example would be an insurance
he

payable at the end of the month of death. In Actuarial Mathematics for Life Contingent Risks, they
use the precise name m1 –thly insurance for this concept, where, for example, m = 12 if the insurance
at
lM

is payable at the end of the month of death, but most other textbooks and actuaries would call it an
“m–thly insurance”.
ia

This should not confuse you, because exam questions will say “quarterly”, “monthly”, or “4 times
ar

a year”, or something similar. The concept of m–thly insurance is neither realistic (since commercially
tu

sold insurances pay soon after the moment of death) nor helpful for calculations (since mortality tables
Ac

are by year, not by month). However, the concept will be useful when dealing with m–thly annuities,
which are a realistic product.
(m) (m)
Let Kx be the future lifetime of (x) rounded down to the next lowest m1 . Moreover Kx can be
(m)
defined by the formula Kx = m1 ⌊mTx ⌋, Thus if (40) dies exactly after 30.4 years (this means that
(2) (4) (12)
death occurs at age 70.4), then K40 = 30, K40 = 30.25, and K40 = 30 + 31 .
(m)
The distribution of Kx is given by
   
(m) k k k 1
k 1 qx = P
| Kx = =P ≤ Tx < + .
m m m m m m
 63

And
k 1
| qx = k 1
+m qx − k qx = k px − k 1
+m px = k px × 1 qx+ k
m m m m m m m m m

(m)
A (with suitable subscripts) is the actuarial present value of an insurance that pays at the end of a
(12)
period of m1 years in which the death occurs. For example, Ax is the APV of a whole life insurance
(m) (m) 1
that pays 1 at the end of the month of death on (x). Then Ax = E[v Kx + m ]. Calculating this
requires summing up probabilities of death within each m1 year n times an appropriate discount factor:
∞
k 1
X
A(m)
x = v m+m k 1
| qx .
m m
i k=0
hb
For an n–year term m–thly life insurance on 1 on (x) the APV of future benefits is given by
da

nm−1
Ed

k 1
X
1(m)
Ax:n = v m+m k 1 qx
|
m m
k=0
ed
m

For an n–year endowment m–thly life insurance on 1 on (x) the APV of future benefits is given by
ha

nm−1
M

k 1
(m)
X
Ax:n = v m+m k 1
| qx + v n n px
m m
f.

k=0
o

sa
Pr

u.
ed

Example 3.1.10 You are given that q45 = 0.01 and q46 = 0.02. Mortality is uniformly distributed
1(2) .
u.

between integral ages and i = 0.05. Calculate A45:2

I
ks

els
@

Solution: The actuarial present value of future benefits is given by

od
i
hb

lM
(2) 0 1 1 1 2 1 3 1
A45:2
1 = v 2+2 0 1
| q45 + v 2 + 2 1 1
| q45 + v 2 + 2 2 1
| q45 + v 2 + 2 3 1
| q45
da

2 2 2 2 2 2 2 2
ica
ed

at
m

q45 = 0.5 q45 = 0.5q45 = 0.5 × 0.01 = 0.005,

m

0 1
|
2 2
he

0.5|0.5 q45 = q45 − 0.5 q45 = q45 − 0.5q45 = 0.5q45 = 0.005,

at

1|0.5 q45 = p45 × 0.5 q46 = (1 − q45 ) ( 0.5 q46 )

lM

= (1 − q45 ) (0.5q46 ) = (1 − 0.01) (0.5 × 0.02) = 0.0099

ia

and
ar
tu

3 1
| q45 = 1.5 p45 − 2 p45 = p45 × 0.5 p46 − p45 p46
Ac

2 2

= p45 (1 − 0.5q46 − 1 + q46 ) = 0.5 p45 q46

= 0.5 (0.99 × 0.02) = 0.0099.

Example 3.1.11 For a special 2–year term insurance policy on (x), you are given: (i) Death benefits
are payable at the end of the half–year of death. (ii) The amount of death benefit is 300 for the first
half-year and increases by 30 per half-year thereafter. (iii) qx = 0.16 and qx+1 = 0.23. (iv) i(2) = 0.18
(v) Deaths are assumed to follow a constant force of mortality between integral ages. (vi) Z is the
present value random variable for this insurance. Calculate P(Z > 277)
 64

Solution: Using the terminologies defined earlier, this is a special m–thly 2–year term life insurance,
(2)
with m = 2. Obviously, the value of Z depends on the underlying random variable, Kx . When
(2)
Kx = 0, 0.5, 1 or 1.5, a death benefit will be paid and Z will take a non-zero value; otherwise, Z = 0.
The required probabilities are computed as follows:

P Kx(2) = 0 = 0.5 qx = 1 − 0.5 px = 1 − (0.84)1/2 = 0.083485

P Kx(2) = 0.5 = 0.5|0.5 qx = qx − 0.5 qx = 0.16 − 0.083485 = 0.076515

P Kx(2) = 1 = 1|0.5 qx = px 0.5 qx+1 = 0.84 × 1 − (0.77)1/2 = 0.102903

P Kx(2) = 1.5 = 1.5|0.5 qx = 1.5 px − 2 px = 0.84 × (0.77)1/2 − 0.84 × 0.77 = 0.090297

P Kx(2) ≥ 2 = 2 px = 0.84 × 0.77 = 0.6468.

i
hb
The value of Z and the corresponding probabilities are shown in the following table:
da
Ed

(2)
Kx Z Probability
ed

300
0 = 275.2294 0.083485
m

1.09
ha
M

330
0.5 = 277.7544 0.076515
(1.09)2
f.
o

sa
Pr

360
u.

1 = 277.98.1 0.102903
ed

(1.09)3
u.

I
390
ks

els
1.5 = 276.2858 0.090297
(1.09)4
@

od
i
hb

≥2 0 0.6468
lM
da

From the table, it is clear that

ica
ed

at
m

P(Z > 277) = 0.076515 + 0.102903 = 0.179418.

m
he
at
lM

3.2 Continuous Life Insurance Policies (CLIP)

ia
ar

In Financial Mathematics you learnt how to value the present value of a payment that is made at a
tu

fixed future time. For example, if one guarantees to make a payment of $500, 000 in 20 years, then
Ac

the present value of that payment today at an annual effective interest rate of i is
500, 000
PV0 (500, 000)20 = = 500, 000v 20
(1 + i)20
By contrast, insurance payments are contingent upon one or more future event. For example, if an
insurance policy sold to (x) promises to pay an amount of $500, 000 at the moment of the policyholder’s
death, then the present value of that life–contingent payment today at an effective interest rate of i is

500, 000
PV0 (500, 000)Tx = = 500, 000v Tx .
(1 + i)Tx
 65

Note that the present value is random, because it depends on a random quantity Tx . We call it the
present value random variable for the insurance policy. In this chapter, we will study in great depth
the present value random variables for several important life insurance policies.
In this and this section, we will discuss the evaluation of moments of insurances payable at the
moment of death. The present value random variable for such an insurance is continuous. We
sometimes say that the insurance is continuous.
A whole life insurance pays a benefit at the moment of death of the policyholder, whenever it
occurs. Throughout this section, we use bt to denote the benefit function, that is, the amount of
benefit as a function of Tx .

Death benefit
i ··· ··· bt ··· bTx ···
hb
Timeline
da

Future life time in years 0 1 2 t ··· Tx ···

Ed

Present value: PV0 (b) bTx v Tx ··· ··· bt ··· bTx ···
ed

A few important life insurance policies are covered in this section. First, let us talk about the simplest
m

policy, level benefit whole life insurance.

ha
M

3.2.1 Level Benefit Continuous Whole Life Insurance (LBCWLI)

f.
o

For now we focus on level benefit policies. A level benefit policy pays the same amount of benefit,
sa
Pr

regardless of the time at which the benefit is paid. Furthermore, to simplify calculations, we assume for
u.
ed

now that the benefit is $1. The diagram below illustrates the mechanism of a unit–benefit continuous
whole life insurance:
u.

I
ks

els
Death benefit ··· ··· 1 ··· 1 ···
@

od
Timeline
i
hb

Future life time in years 0 1 2 t ··· Tx ···

lM
da

Present value: PV0 (1) v Tx ··· ··· 1 ··· 1 ···

ica
ed

We denote PV0 (1) present value random variable by Z = v Tx = e−δTx , for all Tx ≥ 0. Throughout
at
m

this chapter, we shall use Z to denote the present value random variable for a unit–benefit insurance
m

policy.
he

The main questions we are particularly interested in are the expected value E [Z] and the variance
at

Var(Z) of Z.
lM

The first contract we will discuss is whole life insurance. Whole life insurance on (x) pays a benefit
ia

at the time of (x)’s death, whenever (x) dies. Let us consider a whole life insurance of 1 on (x) that
ar

pays 1 at the moment of death of (x) . When an insurance is payable at the moment of death, it is
tu

called continuous, since the random variables associated with its present value are continuous random
Ac

variables. Let Z denote the present value of this whole life insurance. We have defined Tx as the time
until death. Then Z = v Tx . The benefit function and the present value random variable are given by

Benefit at the moment of death Present value of the benefit

bTx = 1 for all Tx ≥ 0 Z = v Tx = e−δTx for all Tx ≥ 0

The expected value of Z is obtained by integrating v Tx , over the density function of Tx

Z ∞ Z ∞
 −δTx  −δt
E [Z] = E e = e fx (t)dt = e−δt t px µx+t dt =: Āx .
0 0
 66

Whenever we have a limiting age ω we write

Z ω−x Z ω−x
 −δTx  −δt
E [Z] = E e = e fx (t)dt = e−δt t px µx+t dt =: Āx
0 0

We call E[Z] = Āx the actuarial present value or more commonly the actuarial present value (APV)
of future benefits. This means that Āx is APV for a continuous unit–benefit whole life insurance on
(x). The x indicates the age of the policyholder at the beginning of the contract, and the bar above
A indicates that a benefit of 1 is payable at the moment of death.

Definition 3.2.1 We say that E[Z] = Āx is the net single premium for the policy. By net we mean
bi
that the premium is not loaded with any expenses, and by single we mean that the premium is paid as
h
da

a single lump sum at the inception (issuance date) of the contract.

The variance of Z is given by definition as
Ed

Z ∞
2
2
2
e−2δt fx (t)dt − Āx = 2 Āx − Āx
ed

 2
Var(Z) = E Z − (E [Z]) =
m

0
ha

2
where Āx is calculated as in Āx by replacing δ with 2δ.
M

Example 3.2.1 You are given that µx = µ for all x ≥ 0. Let Z be the present value random variable
.
of

for a whole life insurance with a level benefit of $1 payable at the moment of death.
.sa
Pr

(a) Derive expressions for Āx and Var(Z) in terms of µ and the force of interest δ.
u

(b) Assume that µ = 0.01 and δ = 0.02. Find the probability that the net single premium is insufficient
ed

to cover the benefit.

u.

I
els
ks

Solution: (a) We have

@

od
bi

Z ∞ Z ∞ Z ∞

lM
−δt −δt −µt
Āx = e t px µx+t dt = e e µ dt = µ e−(µ+δ)t dt
ah

0 0 0
ica
d

Z ∞
µ µ
ed

= (µ + δ) e−(µ+δ)t dt = .
at

µ+δ µ+δ
m

0
m

µ
Moreover 2 Āx = , then
he

µ+2δ
 2
µ µ
at

Var(Z) = − .
lM

µ + 2δ µ+δ
0.01 1
Āx = = = 0.33333 and
ia

0.01+0.02 3
r
ua

 2  2
0.01 1 1 1 4
Var(Z) = − = − = = 0.088889.
t

0.01 + 2 × 0.02 3 5 3 45
Ac

(b) The required probability is

 

−δTx 1
P Z > Āx = P e > = P (−δTx > − ln(3))
3
   
ln(3) ln(3)
= P Tx < = P Tx <
δ 0.02
−54.931×0.01
= P (Tx < 54.931) = 1 − e = 0.42265.
 67

Remark 3.2.1 In practice, insurance companies sell policies for other amounts. Consider a whole
life insurance with a benefit of S dollars payable at the moment of death. The present value random
variable for this policy is SZ. The actuarial present value of this policy is given by

2 
E [SZ] = S Āx and Var(SZ) = S 2 2 Āx − Āx

Exercise 3.2.1 Z is the present–value random variable for a whole life insurance of b payable at the
moment of death of (x). You are given:
(i) δ = 0.04, (ii) µx+t = 0.02 for t > 0.
i
hb
(ii) The Net Single Premium for this insurance is equal to Var(Z). Calculate the benefit b.
da

Solution: Let Z denotes the present value random variable for a whole life insurance with level benefit
Ed

b. We can calculate the first two moments of Z as follows:

ed

µ 0.02 2b b
E [Z] = b Āx = b =b = =
m

µ+δ 0.02 + 0.04 6 3

ha

and
M

µ 0.02 2b2 b2
E Z 2 = b2 2 Āx = b2 = b2
 
= =
f.

µ + 2δ 0.02 + 0.08 10 5
o

sa
Pr

therefore the variance of Z is given by

u.
ed

 2
b2 b 4
Var(Z) = E Z 2 − (E [Z])2 = = b2 .
 
−
u.

I
5 3 45
ks

els
@

Remember that the Net Single Premium for this insurance E [Z] is equal to Var(Z). It follows that

od
i
hb

4 2 b 45 15
lM
da

b = , then b = = = 3.75
45 3 4×3 4
ica
ed

at

Finally the NSP is given by 3.75

m

3
= 1.25
m

Exercise: Repeat the previous example and exercise for UDD. In this case we have to consider limiting
he

age ω. Therefore we have

at

Z ω−x Z ω−x
b b 1 − e−δ(ω−x)
lM

−δt
NSP = E [Z] = b Āx = E [Z] = b e fx (t)dt = e−δt dt = .
0 ω−x 0 ω−x δ
ia
ar

and
ω−x ω−x
b2 b2 1 − e−2δ(ω−x)
Z Z
tu

−2δt
E Z 2 = b2 2 Āx = b2 e−2δt dt =
 
e fx (t)dt =
ω−x ω−x 2δ
Ac

0 0

To find b we equate NSP with Var(Z) that gives

2
b 1 − e−δ(ω−x) b2 1 − e−2δ(ω−x) b 1 − e−δ(ω−x)

= −
ω−x δ ω−x 2δ ω−x δ

which can be simplfied as

b b 1 − e−δ(ω−x)
1 + e−δ(ω−x) −


1=
2 ω−x δ
 68

hence
2δ (ω − x)
b= .
δ (ω − x) (1 + e−δ(ω−x) ) − 1 + e−δ(ω−x)
It remains to sprecify the x and ω. for example if x = 30 and ω = 100, thus
2 × 0.04 (70)
b= = 2.75715.
0.04 (70) (1 + e−0.04(70) ) − 1 + e−0.04(70)
So the NSP is given by

b 1 − e−δ(ω−x) 2.75715 1 − e−0.04(70)

= = 0.92481.
ω−x δ 70 0.04
i
hb
da

3.2.2 Level Benefit Continuous Term Life Insurance (LBCTLI)

Ed

An n–year term life insurance pays a benefit at the moment of death only if death occurs in the
ed

following n years. Because it does not cover the entire lifetime, it is cheaper than a whole life
insurance with the same amount of benefit.
m

For now, we focus on level benefit n–year term life insurances. Further, to standardize notation,
ha

we assume that the benefit amount is $1. The payout from a unit–benefit n–year term life insurance
M

is illustrated in the following diagram.

f.
o

sa

Death benefit ··· ··· ··· 1 ··· 1 ··· 0 ···

Pr

u.

Timeline
ed

Future life time in years 0 0 0 · · · Tx · · · n · · · Tx · · ·

u.

Present value: PV0 (1) v Tx or 0 ··· ··· ··· 1 ··· 1 ··· 0 ···

I
ks

els
The benefit function and the present value random variable are given by
@

od
i
hb

Benefit at the moment of death Present

 value lM
of the benefit
da

Tx
1 if Tx ≤ n v if Tx ≤ n
bT x = Z=
ica
ed

0 if Tx > n. 0 if Tx > n.
at
m

The actuarial present value, i.e., E [Z], can be calculated as

m
he

Z n Z n
−δt
E [Z] = e fx (t)dt = e−δt t px µx+t dt = Āx:n
1
at

0 0
lM

and we have E [Z 2 ] = 2 1
Āx:n 1
where
Āx:n 2
means that Āx:n 1 is evaluated for 2δ. Consequently
ia
ar

Z n
2
2
2
e−2δt fx (t)dt − Āx:n
 2
Var(Z) = E Z − (E [Z]) = 1 = 2 Āx:n
1 1
− Āx:n .
tu

0
Ac

In this symbol, the 1 above x indicates that the policy is an n–year term life insurance. (It does not
carry any numerical meaning.) The subscript n indicates that coverage is provided for at most n
years.

Example 3.2.2 The actuarial present value of an n–year term insurance paying 10, 000 at the moment
of death to (x) is 363. You are given: (i) µx+t = 0.008, t > 0 (ii) δ = 0.032. Determine n.

µ
1 − e−n(µ+δ) = 0.008
(1 − e−0.04n ) = 0.2 (1 − e−0.04n ) = 0.0363, which gives


1
Solution: We Āx:n = µ+δ 0.04
n = 5.007 ≃ 5.
 69

3.2.3 Pure Endowment Life Insurance (PELI)

An n–year pure endowment provides a payment at the end of n years if the policyholder survives, but
makes no payment if the policyholder dies within n years. As before, we assume the benefit amount
is $1. The payout from a unit benefit n–year pure endowment is illustrated in the diagram below.

Survival benefit ··· ··· ··· 0 ··· 1 ··· 0 ···

Timeline
Future life time in years 0 1 2 · · · Tx · · · n ··· Tx ···
Present value: PV0 (1) 0 or v n ··· ··· 0 1 ··· 0 ···
bi
Unlike the previous two policies, the benefit from an n–year pure endowment is paid at time n (instead
h
of time Tx ). Hence, the appropriate discount factor is v n , and benefit function and the present value
da

random variable are given by

Ed

Survival
 benefit just after n Present
 value of the benefit
ed

0 if Tx ≤ n 0 if Tx ≤ n
bTx = Z=
m

1 if Tx > n. v n if Tx > n.
ha

The actuarial present value, i.e., E [Z], can be calculated as

M

E [Z] = v n P (Tx > n) = v n n px = Ax: n1 =

.

n Ex .
of

.sa
Pr

and we have E [Z 2 ] = 2
Ax: n1 = v 2n n px thus
u
ed

2
Var(Z) = 2
Ax: n1 − Ax: n1
u.

I
els
= v 2n n px − v 2n ( n px )2 = v 2n n px (1 −
ks

n px ) = v 2n n px n qx .
@

od
In this symbol, the 1 above n indicates that the policy is a pure endowment. (It does not carry any
bi

lM
ah

numerical meaning.) We do not write a bar above A, because the payment is made at time n
instead of time Tx .
ica
d
ed

at
m

3.2.4 Level Benefit Continuous Endowment Life Insurance (LBCELI)

m
he

An n–year endowment insurance provides an amount to be paid at the moment of death if death
at

occurs in the next n years or at the end of year n if the policyholder survives to that time. As before,
lM

to standardize notation, we assume that the benefit amount is $1. The payout from a unit–benefit
n–year endowment insurance is illustrated in the diagram below.
ia
r
ua

Death benefit ··· ··· ··· 1 ··· 1 ··· 0 ···

t
Ac

Survival benefit 1
Timeline
Future life time in years 0 1 2 · · · Tx · · · n ··· Tx ···
Present value: PV0 (1) v Tx or v n ··· ··· ··· 1 ··· 1 ··· 0 ···

The benefit function and the present value random variable are given by

Benefit at the moment of death Present

 value of the benefit
Tx
1 if Tx ≤ n v if Tx ≤ n
bTx = = 1 for all Tx ≥ 0 Z =
1 if Tx > n. v n if Tx > n.
 70

Remark 3.2.2 By comparing the previous three diagrams, one can see that an n–year endowment
insurance is simply a combination of an n–year term insurance and an n–year pure endowment. It
follows that The actuarial present value, i.e., E [Z] for an n–year endowment insurance can be expressed
as Z n
E [Z] = e−δt fx (t)dt + v n n px = Āx:n
1 + Ax: n1 =: Āx:n
0

Moreover E [Z 2 ] = 2
Āx:n where 2
Āx:n means that Āx:n is evaluated for 2δ. Consequently

2
Var(Z) = E Z 2 − (E [Z])2 = 2 Āx:n − Āx:n .
 
i
hb
da

Example 3.2.3 You are given that µx = µ for all x ≥ 0. (a) Derive an expression for Āx:n in terms
Ed

of µ and δ. (b) Assume that µ = 0.01 and δ = 0.02. Calculate Ā30:5 .

ed

Solution:
m

µ
1 − e−n(µ+δ) + e−n(µ+δ) .


1
(a) Āx:n = Āx:n + n Ex = µ+δ
ha

µ
1 − e−5(µ+δ) + e−5(µ+δ) = 0.01 1 − e−5(0.03) + e−5(0.03) = 0.90714.



(b) Ā30:5 = µ+δ
M

0.03

Example 3.2.4 You are given: (i) The benefit of 120, 000 on a ten–year endowment insurance is
f.
o

sa

payable at the moment of death, or at the end of 10 years if (x) survives 10 years. (ii) µx+t = 0.02 for
Pr

u.

t > 0 (iii) δ = 0.04. Calculate the actuarial present value.

ed

Solution: The APV is given by 120000 Āx:10 and we know that

u.

I
ks

els
µ
1 − e−n(µ+δ) + e−n(µ+δ)


1
Āx:n = Āx:n + n Ex =
@

od
µ+δ
i
hb

for n = 10, µ = 0.02 and δ = 0.04 lM

da

ica
0.02
ed

1 − e−10(0.06) + e−10(0.06) = 0.69921.

Āx:10 =
at
m

0.02 + 0.04
m

Finally APV is given by 120000 Āx:10 = 120000 × 0.69921 = 83905.

he
at

3.2.5 Level Benefit Deferred Continuous Whole Life Insurance (LBDCWLI)

lM

An n–year deferred whole life insurance pays a benefit at the moment of death if the policyholder has
ia

lived at least n years. As before, for notational convenience, we assume that the benefit amount is
ar

$1. The payout from a unit–benefit n–year deferred whole life insurance is illustrated in the diagram
tu

below.
Ac

Death benefit ··· ··· ··· 0 ··· 0 ··· 1 ···

Timeline
Future life time in years 0 1 2 · · · Tx · · · n · · · Tx · · ·
Present value: PV0 (1) 0 or v Tx ··· ··· ··· 0 ··· 0 ··· 1 ···

The benefit function and the present value random variable are given by

Benefit at the moment of death Present

 value of the benefit
0 if Tx ≤ n 0 if Tx ≤ n
bT x = Z= Tx
1 if Tx > n. v if Tx > n.
 71

The actuarial present value, i.e., E [Z], can be calculated as

Z ∞ Z ∞
−δt
E [Z] = e fx (t)dt = e−δt t px µx+t dt = n| Āx
n n
The subscript n| on the left–hand side of the symbol indicates that the coverage is deferred by n
years. Similarly E [Z 2 ] = 2 n| Āx and

2
Var(Z) = 2 n| Āx − n| Āx .

Example 3.2.5 A 5–year deferred whole life insurance of 200, 000 on (x) is payable at the moment
of death. You are given that
i
hb
µx+t = 0.02 for all t ≥ 0 and δ t = 0.06 for all t ≥ 0.
da

Calculate the actuarial present value (net single premium) of this insurance.
Ed

Solution: The APV of the insurance is given by 200000 5| Āx where

ed

Z ∞ Z ∞
−δt µ −5(µ+δ) 0.02 −5×0.08
e−δt e−µt µ dt =
m

5| Āx = e t px µx+t dt = e = e = 0.16758

µ+δ 0.08
ha

5 5
so the APV is 200000 × 0.16758 = 33516.
M

Example 3.2.6 A 20–year deferred insurance on (35) pays a benefit of 5000 at the moment of death
f.
o

if death occurs no earlier than 20 years from now. You are given: (i) Mortality for (35) is uniformly
sa
Pr

distributed with ω = 100. (ii) δ = 0.06, (iii) Z is the random variable for the present value of the
u.

insurance. Calculate E [Z].

ed
u.

1 1

I
Solution: Remark first that the density f35 (t) is = for t < 65 and 0 for t ≥ 65, so the
ks

els
100 − 35 65
expected value is
@

od
i

Z 100−35 Z 65
hb

1
lM
−δt
E [Z] = e bt f35 (t) dt = 5000e−0.06t dt
65
da

20 20
ica
20
1000 65 −0.06t 1000 e−0.06t
ed

Z 
1000
= e dt = = × 4.6825 = 360.19
at
m

13 20 13 0.06 65 13
m
he
at

Actuarial notation for standard types of continuous insurance

lM

Name Present value r.v. Symbol APV or EPV

ia

Whole life insurance v Tx = e−δTx Āx

ar
tu


v Tx if Tx ≤ n
Ac

n–year term life insurance 1

Āx:n
0 if Tx > n.
0 if Tx ≤ n
n–year pure endowment insurance n Ax: n1 = n Ex = v n n px
 vT if Tx > n.
v x if Tx ≤ n
n–year endowment insurance n Āx:n
 v if Tx > n.
0 if Tx ≤ n
n–year deferred whole life insurance n| Āx
 v Tx if Tx > n.
 0 if Tx ≤ n
Tx 1
n–year deferred m–year term insurance v if n < Tx ≤ n + m n| Āx:m
0 if Tx > n + m.

 72

3.2.6 Non–Level–Benefit Insurances

Continuously Increasing Continuous Whole Life Insurance
Now, let us consider insurance policies which have non–level benefits. First, we consider a whole life
insurance with a benefit that increases continuously with time. The benefit function and the present
value random variable are given by
Benefit at the moment of death Present value of the benefit
bTx = Tx for all Tx ≥ 0
i Z = Tx v Tx = Tx e−δTx for all Tx ≥ 0
hb
The actuarial present value can be calculated as follows
da

Z ∞ Z ∞
−δt
te−δt t px µx+t dt = (I¯Ā)x
Ed

E [Z] = te fx (t) dt =
0 0
ed

The I in the symbol indicates that the policy has an increasing benefit, and the bar above I
m
ha

indicates that the increase in benefit is continuous.

But for the second moment and the variance there is no symbol.
M

Z ∞ Z ∞
f.

2 −2δt
t2 e−2δt t px µx+t dt
 2
E Z = te fx (t) dt =
o

sa
Pr

0 0
u.

and should be calculated directly.

ed
u.

I
Example 3.2.7 A continuously increasing whole life insurance on (40) pays a benefit of t at the
ks

els
moment of death if death occurs at time t. Calculate the net single premium for this insurance when
@

od
δ = 0.02 and the mortality follows ℓx = 120 − x, 0 ≤ x ≤ 120.
i
hb

Solution: Using actuarial notation for continuous increasing insurance we have lM

da

ica
ed

Z 120−40 Z 80
1
(I¯Ā)40 = −δt
te f40 (t) dt = te−0.02t dt = 14.846.
at
m

0 0 80
m
he
at

Example 3.2.8 For a continuously increasing whole life insurance on (x), you are given:
(i) The force of mortality is constant. (ii) δ = 4%. (iii) 2 Āx = 0.25.
lM

Calculate (I¯Ā)x
ia
ar

Annually Increasing Continuous Whole Life Insurance

tu
Ac

Alternatively, the benefit may increase annually by 1 instead of continuously. The benefit function
and the present value random variable are given by
Benefit at the moment of death Present value of the benefit
bTx = ⌊Tx + 1⌋ for all Tx ≥ 0 Z = ⌊Tx + 1⌋ v Tx = ⌊Tx + 1⌋ e−δTx for all Tx ≥ 0
The actuarial present value can be calculated as follows
Z ∞ Z ∞
−δt
E [Z] = ⌊t + 1⌋ e fx (t) dt = ⌊t + 1⌋ e−δt t px µx+t dt = (IĀ)x
0 0

There is no bar above the I in the symbol, because the benefit is not increasing continuously.
 73

Remark 3.2.3 Similarly, we can define other non–level benefit insurance policies, for example, a
continuously (or annually) increasing n–year term life insurance and a continuously (or annually)
increasing n–year endowment insurance. We can also prescribe a decreasing benefit function to create
policies such as a continuously decreasing n–year term life insurance.
The following table summarizes the formulas for various non–level–benefit insurances.
Non–Level–Benefit Insurances (Continuous)
Policy Actuarial Present Value
Notation formula
Z ∞
Continuously increasing whole life insurance (I¯Ā)x
i te−δt t px µx+t dt
hb
0
da
Ed

Z ∞
Annually increasing whole life insurance (IĀ)x ⌊t + 1⌋ e−δt t px µx+t dt
ed

0
m
ha

Z n
Continuously increasing n–year term (I¯Ā)x:n
1 te−δt t px µx+t dt
M

0
f.
o

sa
Pr

Z n
u.

Annually increasing n–year term 1

(IĀ)x:n ⌊t + 1⌋ e−δt t px µx+t dt
ed

0
u.

I
ks

els
(I¯Ā)x:n (I¯Ā)x:n
1 + n Ax: n1
@

Continuously increasing n–year endowment

od
i
hb

lM
da

Annually increasing n–year endowment (IĀ)x:n 1

(IĀ)x:n + n Ax: n1
ica
ed

at
m

Z n
Continuously decreasing n–year term 1
(D̄Ā)x:n (n − t) e−δt t px µx+t dt
he

0
at
lM

Z n
(n − ⌊t⌋) e−δt t px µx+t dt
ia

Annually decreasing n–year term 1

(DĀ)x:n
ar

0
tu
Ac

Example 3.2.9
Assume that the remaining lifetime for (x) is uniformly distributed over [0, 2] and δ = 0.05.
Calculate (a) (I¯Ā)x , (b) (IĀ)x , (c) (DĀ)x:2
1 and (d) (D̄Ā)x:2
1 .

Solution:
(a) we have
Z 2 Z 2
1
(I¯Ā)x = te −δt
fx (t) dt = te−0.05t dt
0 0 2
Z 2
1
= te−0.05t dt = 0.93576.
2 0
 74

(b) we can write

Z 2 Z 2
−δt 1
(IĀ)x = ⌊t + 1⌋ e fx (t) dt = ⌊t + 1⌋ e−0.05t dt
0 2
Z0 2
1 1
Z
1
= ⌊t + 1⌋ e−0.05t dt + ⌊t + 1⌋ e−0.05t dt
2 0 2 1
1 1 −0.05t 1 2 −0.05t
Z Z
= e dt + 2e dt = 0.48770 + 0.92784 = 1.41554
2 0 2 1
We observed that the continuously increasing continuous n–year term insurance is cheaper
than the annually increasing continuous n–year term insurance
i
hb
(c) By definition
da

Z 2
1 2
Z
Ed

−δt
(DĀ)x:2 =
1 (2 − ⌊t⌋) e fx (t) dt = (2 − ⌊t⌋) e−δt dt
0 2 0
ed

1 1 1 2
Z Z
−δt
= (2 − ⌊t⌋) e dt + (2 − ⌊t⌋) e−δt dt
m

2 0 2 1
ha

1 1 −δt 1 2
Z Z
= 2e dt + (2 − 1) e−δt dt
M

2 0 2 1
Z 1
1 2 −0.05t
f.

Z
−0.05t
o

= e dt + e dt = 1.439332
sa
Pr

0 2 1
u.
ed

(d) We have also

u.

I
Z 2 Z 2
1
ks

els
−δt
(D̄Ā)x:2
1 = (2 − t) e fx (t) dt = (2 − t) e−0.05t dt = 0.96748.
@

od
0 0
i
hb

We observed that the continuously decreasing continuous n–year term insurance is cheaper
lM
da

than the annually decreasing continuous n–year term insurance.

ica
ed

Example 3.2.10 For a special whole life insurance policy on (55) with benefits payable at the moment
at
m

of death, you are given:

m

50 2
he

(i) bt = , for t < 50. (ii) µx = , for x < 105. (iii) δ = 0.04. Calculate the net single
50 − t 105 − x
at

premium for this insurance.

lM

Solution: First denote by NSP the net single premium for this insurance. By definition we have
ia
ar

Z 105−55 Z 50
−δt
NSP = e bt t p55 µ55+t dt = e−δt bt t p55 µ55+t dt.
tu

0 0
Ac

We first calculate t p55 ?

 2  2
−
Rt
µ55+u du −
R 55+t
µu du 50 − t t
t p55 =e 0 =e 55 = = 1− .
50 50
Therefore
50 2 50
1 − e−0.04×50

50 − t
Z Z
−0.04t 50 2 1
NSP = e dt = e−0.04t dt = = 0.86466.
0 50 − t 50 50 − t 25 0 25 × 0.04
 75

Example 3.2.11 For a special 10–year term insurance on (x), you are given: (i) Z is the present
value random variable for this insurance. (ii) Death benefits are paid at the moment of death. (iii)
µx+t = 0.02 for t > 0, δ = 0.08, bt = 5000e0.03t . Calculate Var(Z).

Solution: We know that Var(Z) = E [Z 2 ] − (E [Z])2 . Thus

Z 10 Z 10
−δt
E [Z] = e bt t px µx+t dt = 5000 e−0.08t e0.03t e−0.02t 0.02 dt
0 0
Z 10
= 100 e−0.05t e−0.02t dt
i Z0 10
100
hb
e−0.07t dt = 1 − e−0.7 = 719.1639.


= 100
0.07
da

0
Ed

Similarly we have
10 10
ed

Z Z
2
E Z2 = e−2δt b2t t px e−0.16t e0.06t e−0.02t 0.02 dt
 
µx+t dt = (5000)
m

0 0
ha

Z 10
500000
e−0.12t dt = 1 − e−1.2 = 2911691.


= 500000
M

0 0.12
f.

Consequently Var(Z) = 2911691 − (719.1639)2 = 2394494.

o

sa
Pr

u.
ed

3.3 Relations between Level–Benefit Policies

u.

I
ks

els
Continuous Discrete m–thly
@

od
i

(m) (m)
+ Ax: n1 + Ax: n1 + Ax: n1
hb

Endow = Term + Pure Endow 1

Āx:n = Āx:n 1
Ax:n = Ax:n Ax:n = Ax:n
1

lM
da

ica
ed

1 1 (m) (m) (m)

Whole = Term + deferred Āx = Āx:n + n| Āx Ax = Ax:n + n| Ax Ax = Ax:n
1 + n| Ax
at
m

m
he

(m) (m)
Deferred = Pure × Whole n| Āx = n Ex Āx+n n| Ax = n Ex Ax+n n| Ax = n Ex Ax+n
at
lM

where n Ex = v n n px = Ax: n1 .
ia
ar

i i 1
tu

1
Under UDD Āx = Ax and Āx:n = Ax:n .
Ac

δ δ
µ
1
Under CRM Āx:n = (1 − n Ex ) and n Ex = e−(µ+δ)n
δ+µ
 76

3.3.1 Recursions
Policy Discrete recursion

whole life Ax = v qx + v px Ax+1

1 1
n–year term life Ax:n = v qx + v px Ax+1:n−1

n–year endowment i Ax:n = v qx + v px Ax+1:n−1

hb
da

n–year pure endowment n Ex = v px n−1 Ex+1

Ed
ed

n–year deferred whole life n| Ax = v px n−1| Ax+1

m
ha
M

Annually increasing whole life (IA)x = v qx + v px ((IA)x+1 + Ax+1 )

f.
o

sa
Pr

u.

1 1


Annually increasing n–year term life 1
(IA)x:n = v qx + v px (IA)x+1:n−1 + Ax+1:n−1
ed
u.

I
ks

els
1 1
Annually decreasing n–year term life (DA)x:n = nv qx + v px (DA)x+1:n−1
@

od
i
hb

Level–benefit m–thly whole life Ax

(m)
=
1
vm qx + v lM(m)
px Ax+ 1
da

1 1
m m m
ica
ed

at
m

To calculate E [Z 2 ] we may also use the following recursion

m
he

2
Ax = v 2 qx + v 2 px 2 Ax+1
2 1
= v 2 qx + v 2 px 2 Ax+1:n−1
1
at

Ax:n
lM

2 2 2 2
Ax:n = v qx + v px Ax+1:n−1
ia
ar
tu
Ac
 77

Policy Continuous recursion

whole life Āx = Āx:1

1 + v p Ā
x x+1

1 + v p Ā 1 2
whole life iterated Āx = Āx:1 x x+1:1 + v 2 px Āx+2

n–year term life 1

Āx:n = 1 + v p Ā 1
Āx:1 x x+1:n−1

i
hb
n–year endowment Āx:n = 1 + v p Ā
Āx:1 x x+1:n−1
da
Ed

n–year deferred whole life n| Āx = v px n−1| Āx+1

ed
m
ha

Variances
M

Discrete Continuous
f.
o

sa
Pr

2
Var(Zx ) = 2
Ax − (Ax )2 Var(Z x ) = 2
Āx − Āx
u.
ed
u.

I
2

2 2

2
Var(Zx:n ) = Ax:n − Ax:n Var(Z x:n ) = Āx:n − Āx:n
ks

els
@

od
i
hb

2
2
lM
1 ) = 2 1 1 1 ) 2 1 1
Var(Zx:n Ax:n − Ax:n Var(Z x:n = Āx:n − Āx:n
da

ica
ed

Note: 2 Ax and 2 Āx are calculated similar to Ax and Āx respectively, but with double the force of
at
m

interest, δ. Equivalently, replace v with v 2 , or replace i with 2i + i2 . For example, under constant
m

force,
he

q µ
2
Ax = and 2 Āx = .
at

q + 2i + i 2 µ + 2δ
lM
ia

3.3.2 Relating m–thly and discrete (annual) insurances

ar
tu

We can relate continuous, discrete and m–thly insurances by using a simple adjustment factor. To
Ac

apply the adjustment factor, the following criteria must be satisfied:

1. There is no endowment component (i.e. survival benefit) in the policy.

2. The benefit within each year is non–varying.

There are two methods of adjustment.

ˆ Using the uniform distribution of death (UDD) assumption, the APV of an m–thly insurance can
be obtained by multiplying the corresponding discrete (annual) insurance with the adjustment
 78

i 1
factor where i(m) = m[(1 + i) m − 1] or equivalently i(m) is set such that
i(m)
m
i(m)

1+ = 1 + i.
m

ˆ Using the accelerated claims approach, the APV of an m–thly insurance can be obtained by
m−1
multiplying the corresponding discrete (annual) insurance with the adjustment factor (1 + i) 2m .

This leads to the following collection of equations.

i
hb
Policy UDD Accelerated claims
da

i
Ed

(m) (m) m−1

whole life Ax = Ax Ax = (1 + i) 2m Ax
i(m)
ed
m

(m) i 1 (m) m−1

n–year term life Ax:n
1 = Ax:n Ax = (1 + i) 2m Ax
ha

i(m)
M

i m−1
(I (m)A)x (I (m)A)x
f.

Annually increasing whole life = (IA)x = (1 + i) 2m (IA)x

i(m)
o

sa
Pr

u.

i
ed

m−1
Annually increasing n–year term life (I (m)A)x:n
1 = 1
(IA)x:n (I (m)A)x:n
1 = (1 + i) 2m 1
(IA)x:n
i(m)
u.

I
ks

els
@

od
i
hb

Remark 3.3.1
lM
da

We observe that
ica
ed

i i i
lim = lim =
at
m

1
m−→+∞ i(m) m−→+∞ m[(1 + i) m − 1] δ
m
he

and
at

m−1 1
lim (1 + i) = (1 + i) 2 ,
lM

2m
m−→+∞
ia

hence an m–thly insurance becomes a continuous insurance. Hence, we have the following for
ar

continuous insurances:
tu
Ac

1. Using the UDD assumption, the APV of a continuous insurance can be obtained by multiplying
the corresponding discrete (annual) insurance with the adjustment factor δi .

2. Using the accelerated claims approach, the APV of a continuous insurance can be obtained by
1
multiplying the corresponding discrete (annual) insurance with the adjustment factor (1 + i) 2 .
 79

Relating continuous and discrete (annual) insurances

Policy UDD Accelerated claims
i 1
Level benefit whole life Āx = Ax Āx = (1 + i) 2 Ax
δ

1
i 1 1
1
1
n–year term life Āx:n = Ax:n Āx:n = (1 + i) 2 Ax:n
δ

i 1
Annually increasing whole life
i (IĀ)x = (IA)x (IĀ)x = (1 + i) 2 (IA)x
δ
hb
da

1
i 1 1
1
1
Annually increasing n–year term life (IĀ)x:n = (IA)x:n (IĀ)x:n = (1 + i) 2 (IA)x:n
Ed

δ
ed
m

Remark 3.3.2 It is important to know that the adjustment factors are not applicable to any
ha

insurance with an endowment component. For example, Āx:n ̸= δi Ax:n under UDD. We can
M

find Āx:n in two steps as follows:

f.
o

sa
i 1
Pr

1
Āx:n = Āx:n + n Ex = Ax:n + n Ex under UDD
u.

δ
ed

Similarly, we find (IĀ)x:n as follows:

u.

I
ks

els
1
(IĀ)x:n = (IĀ)x:n 1
+ n n Ex = (IA)x:n + n n Ex under UDD
@

od
i
hb

lM
da

Example 3.3.1 You are given (i) i = 0.01, (ii) qx = 0.05, (iii) qx+1 = 0.08 Calculate Āx:2 assuming
ica
ed

uniform distribution of deaths for fractional ages (between integral ages).

at
m

Solution:
he

This is an endowment insurance, so we need to split it into two components (term life and pure
at

endowment) before we can apply the adjustment factor. We have

lM

i
Āx:2 = Āx:2
1 + E = A1 + E
2 x 2 x
δ x:2
ia
ar

First,
tu

1 1
Ax:2
1 = v qx + v 2 px qx+1 = × 0.05 + × 0.95 × 0.08 = 0.12401.
Ac

1.01 (1.01)2
Second,

2 Ex = v 2 2 px = (1 + i)−2 px px+1 = (1.01)−2 × 0.95 × 0.92 = 0.85678 and δ = ln(1 + i) = 0.00995.

0.01
Substituting, we obtain Āx:2 = 0.00995
× 0.12401 + 0.85678 = 0.98141.

Example 3.3.2 For a whole life insurance of 1000

 on (x) with benefits payable at the moment of
0.04, 0 < t ≤ 10 0.06, 0 < t ≤ 10
death: (i) δ t = (ii) µx+t =
0.05, t > 10 0.07, t > 10
Calculate the Net Single Premium for this insurance.
 80

Solutions of Exercise 17 in page C3-51 (similar to Exercise 11 page C3-49) Volume I

Direct method:
Z ∞ R  Z 10  R  Z ∞ R 
− 0t δ u du − 0t δ u du − 0t δ u du
Āx = e p µ
t x x+t dt = e p µ
t x x+t dt + e p µ
t x x+t dt
0 0 10

we have
Z 10  Rt  Z 10 Z 10
− −0.04t −0.06t
e 0 δ u du
t px µx+t dt = 0.06 e e dt = 0.06 e−0.1t dt = 0.37927
0 0 0

and Z ∞ Z ∞  R  Z t  

e−
Rt
δ u du
bi  t
e− 0 δ u du
exp −
0
t px µx+t dt = µx+u du 0.07 dt
h
10 10 0
da

Rt Rt
Now, we need to compute δ u du and 0 µx+u du for t > 10,
Ed

0
Z t Z 10 Z t
ed

δ u du = δ u du + δ u du = 0.04 × 10 + 0.05 (t − 10) = 0.05t − 0.1

m

0 0 10
ha

and Z t Z 10 Z t
M

µx+u du = µx+u du + µx+u du = 0.06 × 10 + 0.07 (t − 10) = 0.07t − 0.1

0 0 10
.
of

therefore
.sa
Pr

Z ∞  Rt  Z ∞
u

e− 0 δ u du
e−(0.05t−0.1) e−(0.07t−0.1) 0.07 dt


t px µx+t dt =
ed

10 10
u.

I
Z ∞
e−1.2
0.2
e−0.12t dt = e0.2 0.07

els
= e 0.07
ks

10 0.12
@

od
7
bi

= = 0.21460.

lM
12e
ah

Finally 1000 Āx = 1000 (0.37927 + 0.21460) = 593.87 ≃ 594.

ica
d
ed

Indirect method (decomposition whole = term + deferred)

at
m

Āx = Āx:10
1 + 10| Āx = Āx:10
1 + 10 Ex Āx+10
he

Z 10 Z ∞
−0.04t −0.06t −0.1×10
= e e 0.06 dt + e e−0.05t e−0.07t 0.07 dt
at

0 0
lM

= 0.37927+0.21460 = 0.59387.
ia

Finally we get 1000 Āx ≃ 594.

r
t ua

3.4 Sample Exam Questions

Ac

Exercise 3.4.1

1. A 20–year endowment insurance on (45) pays 1000 at the moment of death if death occurs within
10 years, 500 at the moment of death if it occurs after 10 years, and 500 at the end of 20 years
if the insured is alive. You are given:
(i) Mortality follows the Illustrative Life Table and i = 6%.
(ii) Deaths are uniformly distributed between integral ages.
Calculate the net single premium for the endowment insurance ( Hint use the relation between
continuous and discrete insurance under UDD Āx = δi Ax ).
 81

2. For a special 3–year endowment insurance on (x), you are given the following death probabilities
and death benefits, payable at the end of the year of death:
year k bk qx+k−1
1 30 0.02
2 35 0.04
3 40 NA
The survival benefit is equal to b3 . Calculate the actuarial present value of this insurance for
i = 4%.

Solution: i
hb
1. The net single premium NSP is given by APV of future benefits
da
Ed

1



NSP = 500 Ā45:20 + 500 Ā45:10 = 500 Ā45 − 20 E45 Ā65 + 20 E45 + 500 Ā45 − 10 E45 Ā55


= 1000 Ā45 − 500 20 E45 Ā65 + 10 E45 Ā55 + 500 20 E45 .
ed
m

But under UDD Āx = δi Ax . Therefore

ha

i
M

NSP = (1000 A45 − 500 ( 20 E45 A65 + 10 E45 A55 )) + 500 20 E45
ln(1 + i)
f.

0.06
o

sa

= (201.20 − 0.5 (0.25634 × 439.8 + 0.52652 × 305.14)) + 0.5 × 256.34

Pr

ln(1.06)
u.
ed

= 194.59.
u.

I
ks

els
@

2. The actuarial present value or APV(FB)0 can be calculated as follows

od
i
hb

APV(FB)0 = 30v qx + 35v 2 px qx+1 + 40v 3 2 px qx+2 + 40v 3 3 px

lM
da

= 30v qx + 35v 2 px qx+1 + 40v 3 px px+1 ( qx+2 + px+2 )

ica
ed

= 30v qx + 35v 2 (1 − qx ) qx+1 + 40v 3 (1 − qx ) (1 − qx+1 )

at
m

30 35 40
m

= (0.02) + 2
(0.98) (0.04) + (0.98) (0.96)
1.04 (1.04) (1.04)3
he

= 35.3001
at
lM
ia

Exercise 3.4.2
ar
tu

1. If ℓx = 103 − x for 0 ≤ x ≤ 103, and the force of interest is δ = 0.06, calculate Ā45:20 ·
Ac

2. A 20–year deferred insurance on (35) pays a benefit of 5000 at the moment of death if death
occurs no earlier than 20 years from now. You are given: (i) Mortality for (35) is uniformly
distributed with ω = 100. (ii) δ = 0.06, (iii) Z is the random variable for the present value of
the insurance. Calculate E [Z].
3. The net single premium for a 20–year term insurance on a person currently age 40 with benefit
of 1 payable at the moment of death is 0.065. Now assume that (i) δ = 0.04, (ii) 20 p40 = 0.88,
(iii) p60 = 0.99 and (iv) Deaths occurring between ages 60 and 61 are uniformly distributed.
Calculate the net single premium for a 21–year endowment insurance on a person currently age
40 with benefit of 1 payable at the moment of death.
 82

Solution:

1. For an endowment insurance, we must add a pure endowment.

ā 20 ā 20
1
Ā45:20 = Ā45:20 + 20 E45 =
+ 20 E45 = + v 20 20 p45
103 − 45 58
1 − e−20×0.06 ℓ45+20 1 − e−20×0.06
38
= + e−20×0.06 = + e−20×0.06
58 × 0.06 ℓ45 58 × 0.06 58
= 0.20081 + 0.19733 = 0.39814.

bi
1 1
h
2. Remark first that the density f35 (t) is = for 0 < t < 65 and 0 for t ≥ 65, so the
da

100 − 35 65
expected value is
Ed

Z 100−35 Z 65
1
ed

−δt
E [Z] = e bt f35 (t) dt = 5000e−0.06t dt
65
m

20 20
65 20
1000 e−0.06t
Z 
1000 1000
ha

= e−0.06t dt = = × 4.6825 = 360.19

13 13 0.06 65 13
M

20
.
of

.sa
1 1 1 1
3. By definition Ā40:21 = Ā40:21 + 21 E40 and by recursion Ā40:21 = Ā40:20 + 20 E40 Ā60:1 , and then
Pr

u
ed

1 1
Ā40:21 = Ā40:20 + 20 E40 Ā60:1 + 21 E40
u.

I
els
R1
ks

1
and Ā60:1 = 0 e−δt f60 (t) dt. Remember that f60 (t) = t q60
′
= (tq60 )′ = q60 = 0.01 (UDD since
@

0 < t < 1). Henceforth

od
bi

lM
Z 1
ah

1
0.01e−0.04t dt = 1 − e−0.04 = 0.0098026.
1


Ā60:1 =
ica
4
d

0
ed

at

Or equivalently
m

i 1 eδ − 1 −δ q60
1 − e−0.04 1
he

1 − e−δ = 1 − e−0.04 .
1


Ā60:1 = A60:1 = e q60 = 0.01 =
δ δ δ 0.04 4
at
lM

Moreover, the APVs of the pure endowments are

ia

20 E40 = e−δ20 20 p40 = e−0.04×20 0.88 = 0.39541

r
ua

and
t
Ac

21 E40 = e−δ21 21 p40 = e−0.04×21 20 p40 × p60 = e−0.04×21 × 0.88 × 0.99 = 0.37611.

Finally
Ā40:21 = 0.065 + 0.39541 × 0.0098026 + 0.39146 = 0.44499.

Exercise 3.4.3

1. You are given the following: (i) Ax = 0.25, (ii) Ax+15 = 0.40, (iii) Ax:15 = 0.50, determine
Ax:15
1 .
 83

2. For a 20–year term insurance on a life currently age 40: (i) q40+k = 0.01, k ≥ 0, (ii) if death
occurs in the interval (k, k + 1], the benefit is 2000 (1.03)k . (iii) The benefit is paid at the end of
the year of death. Calculate the actuarial present value of the insurance when i = 6%..
3. A continuously increasing whole life insurance on (40) pays a benefit of t at the moment of death
if death occurs at time t. Calculate the net single premium for this insurance when δ = 0.02 and
the mortality follows ℓx = 120 − x, 0 ≤ x ≤ 120.
4. For a whole life insurance of 1000 on (80), with death benefits payable at the end of the year of
death, you are given:
(i) Mortality follows a select and ultimate mortality table with a one–year select period.
bi
(ii) q[80] = 0.5 q80 , i = 0.06, (iv) 1000 A80 = 679.80, (v) 1000 A81 = 689.52. Calculate 1000 A[80] .
h
da

Solution:
Ed

1. First notice that Ax:15

1 = Ax:15 − 15 Ex = 0.5 − 15 Ex . Moreover
ed

Ax = Ax:15
1 + 15 Ex Ax+15 = 0.5 − 15 Ex + 15 Ex Ax+15 = 0.5 − 15 Ex (1 − Ax+15 ) = 0.25,
m

0.25 0.25
= 0.5 −
ha

that 15 Ex = 0.60
= 0.41667, thus Ax:15
1
0.60
= 0.083333.
M

2. The APV of the insurance, which will be denoted A, is

.

19 19
of

1
.sa
X X
A = v k+1
bk+1 k p40 q40+k = 2000 (1.03)k (0.99)k (0.01)
Pr

k+1
(1.06)
u

k=0 k=0
ed

19  k 19
20 X 1.03 20 X
(0.96198)k
u.

= 0.99 =

I
1.06 1.06 1.06 k=0

els
ks

k=0

20 1 − (0.96198)20
@

od
= = 267.69
bi

1.06 1 − 0.96198

lM
ah

ica
d
ed

3. Using actuarial notation for continuous increasing insurance we have

at
m

Z 120−40 Z 80
1
m

(I¯Ā)40 = −δt
te f40 (t) dt = te−0.02t dt = 14.846.
he

0 0 80
at
lM

4. By recursion formula we have

ia

A[80] = v q[80] + v p[80[ A[80]+1 = v q[80] + 1 − q[80] v A81
r

 
ua

v 1 v q80
= q80 + 1 − q80 v A81 = v A81 + (1 − A81 ) ,
2 2 2
t
Ac

again by recursion we get

A80 = v q80 + v p80 A81 = v q80 + v (1 − q80 ) A81 = v A81 + v q80 (1 − A81 ) ,
which leads to vq80 (1 − A81 ) = A80 − vA81 , consequently
1000 A80 − v1000 A81 1000 A81 1000 A80
1000 A[80] = v1000 A81 + = +
2 2(1.06) 2
689.52 679.80
= + = 665.15.
2(1.06) 2
 84

Exercise 3.4.4
1. A special term insurance policy pays 1000 at the end of the year of death for the first 10 years
and 500 at the end of the year of death for the next 10 years. Mortality follows the Illustrative
Life Table and i = 0.06. Calculate the actuarial present value of a policy on (30).
2. The actuarial present value of an n–year term insurance paying 1000 at the moment of death to
(x) is 570.80. Determine n given that µx+t = 0.07, t > 0 and δ = 0.05.
3. A man, age 46, purchases a 3–year endowment insurance with benefits payable at the end of
the year of death. The benefit is given by the formula: bk = 1000(1.06)k for years k = 1, 2, 3.
Mortality is described in the following table:
bi
h
da

Age 45 46 47 48 49
ℓx 600 590 575 550 −
Ed

Calculate the net single premium for this insurance for i = 0.03.
ed
m

Solution:
ha

1. The actuarial present value of the insurance can be written as

M

1 1 1 1


500 A30:20 + 500 A30:10 = 500 A30:20 + A30:10 = 500 (A30 − 20 E30 A50 + A30 − 10 E30 A40 )
.
of

.sa
= 500 (2 A30 − 20 E30 A50 − 10 E30 A40 )
Pr

= 500 (2 × 0.10248 − (0.29374)(0.24905) − (0.54733)(0.16132)) = 21.754.

u
ed
u.

I
els
ks

µ
1 − e−n(µ+δ) = 70
(1 − e−0.12n ) = 70
(1 − e−0.12n ),


2. We know that APV(FB)0 = 570.80 = 1000 µ+δ 0.07+0.05 0.12
@

od
then n = 32.
bi

lM
ah

3. The net single premium is equal to APV(FB)0 hence

ica
d

2
ed

X
APV(FB)0 = v k+1 bk+1 k| q46 + v 3 b3 3 p46
at
m

k=0
!
he

 2   3
3
1.06 ℓ46 − ℓ47 1.06 ℓ47 − ℓ48
ℓ48 − ℓ49 1.061.06 ℓ49
= 1000 + + +
at

1.03 ℓ46 1.03 ℓ46 ℓ46 1.031.03 ℓ46

lM

 2  3 !
1.06 ℓ46 − ℓ47 1.06 ℓ47 − ℓ48 1.06 ℓ48
= 1000 + +
ia

1.03 ℓ46 1.03 ℓ46 1.03 ℓ46

r
ua

 2  3 !
1.06 590 − 575 1.06 575 − 550 1.06 550
= (1000) + + = 1087.09493
t

1.03 590 1.03 590 1.03 590

Ac

Exercise 3.4.5
1. A woman, age x, purchases a 3–year endowment insurance with benefits payable at the end of
the year of death. The benefit is given by the formula:
k 0 1 2
bk+1 60000 (1 + i) 60000 (1 + i)2 60000 (1 + i)3
Calculate the net single premium for this insurance.
 85

2. A whole life insurance on (40) pays a benefit of 50, 000 at the end of the year of death. The force
of mortality is given by:
t ≤ 10
(
0.02 if
µ40+t = 1
if 10 < t < 50
50 − t
Calculate NSP the net single premium for this insurance when the effective interest rate is 6%.

Solution:

1. The NSP is given by

2
i 2
!
hb
X X
APV(FB)0 = v k+1 bk+1 k| qx + v 3 b3 3 px = 60000 (v(1 + i))k+1 k| qx + (v(1 + i))3 3 px
da

k=0 k=0
Ed

2
! 2
!
X X
= 60000 k| qx + 3 px = 60000 3 px + ( k+1 qx − k qx )
ed

k=0 k=0
m

= 60000 ( 3 px + 3 qx − 0 qx ) = 60000 ( 3 px + 3 qx ) = 60000.

ha
M

2. We can split the insurance into two components: a 10–year term insurance and a 10–year deferred
f.
o

sa
insurance. In the initial 10–year period, px = p = e−0.02 . The APV of the future benefits is
Pr

u.

1 1
ed

NSP = 50000(A40:10 + 10| A40 ) = 50000(A40:10 + 10 E40 A50 )

u.

I
Moreover
ks

els
@

1−p q

od
1 − (vp)10 = 1 − (vp)10
1



A40:10 =
i
hb

1+i−p q+i
10 !
lM
da

1 − e−0.02 e−0.02

= 1− = 0.13469
ica
ed

1.06 − e−0.02 1.06

at
m

and
m
he

a 90−50 1 − v 40
   
10 1 10
10 E40 A50 = (vp) = (vp)
at

90 − 50 40 i
lM

 −0.02 10 !
1 e 1 − (1.06)−40
= = 0.17197
ia

40 1.06 0.06
ar
tu

Thus NSP = 50000 (0.13469 + 0.17197) = 15333.

Ac

Exercise 3.4.6

1. A special insurance on (45) pays 5000 at the end of the year of death if death occurs between
ages 50 and 60, and 3000 at the end of the year of death if death occurs after age 60. Calculate
the net single premium for this insurance using ILT for i = 0.06.
1
2. You are given: i = 0.05, q40 = 0.05 and q41 = 0.08. Calculate Ā40:2 , assuming uniform
distribution of deaths for fractional ages.

Solution.
 86
1
1. Denote by NSP the APV of this insurance, then NSP = 5000 5| A45:10 + 3000 15| A45 . It can be
also written as

NSP = 5000 5| A45 − 2000 15| A45 = 5000 5 E45 A50 − 2000 15 E45 A60

The net single premium for the insurance is

1 ℓ50 1 ℓ60
NSP = 5000 5
0.24905 − 2000 0.36913
1.06 ℓ45 1.0615 ℓ45
1 8950901 1 8188074
= 5000 0.24905 − 2000 0.36913 = 633.64
i 1.065 9164051 1.0615 9164051
hb
da

2. Under UDD
Ed

i 1 i
v q40 + v 2 px qx+1
1


Ā40:2 = A40:2 =
ed

δ ln(1 + i)
m

 
0.05 0.05 0.95 × 0.08
= + = 0.11944
ha

ln(1.05) 1.05 1.052

M
f.
o

sa
Exercise 3.4.7
Pr

u.
ed

1. For a 1–year term insurance on (66.2), you are given: (i) The insurance pays 10, 000 at the end
of the half–year of death. (ii) q66 = 0.06 and q67 = 0.08. (iii) Mortality is uniformly distributed
u.

I
between integral ages. (iv) i = 0.03. Calculate the actuarial present value of the insurance.
ks

els
@

od
(4)
2. We assume that i = 0.06 and µx+t = ln(1.02) for t > 0, calculate Ax
i
hb

lM
da

Exercise 3.4.8
ica
ed

1
1. You are given: (i) px = 0.95 for x = 50, 51, 52 (ii) i = 0.05. Find A50:3 .
at
m

2. You are given: (i) A60 = 0.585, (ii) A61 = 0.605 (iii) q60 = q61 , (iv) i = 0.05. Find A62 .
he
at

3. Let Z be the present value random variable for a 15–year pure endowment of 1 on (x):
lM

7
(i) The force of mortality is constant over the 15–year period, (ii) d = 0.05 and Var(Z) = 100
E[Z].
Calculate qx .
ia
ar

Solution:
tu
Ac

1. By definition
1
A50:3 = v q50 + v 2 p50 q51 + v 3 2 p50 p52 = v (1 − p50 ) + v 2 p50 (1 − p51 ) + v 3 p50 p51 (1 − p52 )
1 − 0.95 0.95 (1 − 0.95) 0.952 (1 − 0.95)
= + + = 0.12968.
1.05 1.052 1.053
 87

2. By recursion we have

A61 = v q61 + v p61 A62 = v q60 + v p60 A62 = v (1 − p60 ) + v p60 A62 = v − v p60 (1 − A62 ) .

We need p60 . It can be found using A60 = v − v p60 (1 − A61 ).

1 1
Hence 0.585 = 1.05 − 1.05 p60 (1 − 0.605) implies that p60 = 0.97658.
1
0.605 − 1.05
(1 − 0.97658)
A62 = 1 = 0.6265.
1.05
0.97658

bi
3. We know that for a 15–year endowment
h
da

Var(Z) = v 30 15 px (1 − 15 px ) and E[Z] = v 15 15 px

Ed

therefore
ed

7
Var(Z) = E[Z] ⇐⇒ v 30 15 px (1 − 15 px ) = 0.07v 15 15 px
m

100
ha

which implies that v 15 (1 − 15 px ) = (0.95)15 (1 − e−15µ ) = 0.07, hence µ = 0.01092. Finally

M

qx = 1 − e−0.01092 = 0.010861.
.
of

.sa
Exercise 3.4.9
Pr

1
1. You are given: (i) Āx:n = 0.4275, (ii) δ = 0.055 (iii) µx+t = 0.045 for all t. Calculate Āx:n .
ed
u.

I
Solution.

els
ks
@

od
1. We have Āx:n = Āx:n 1 + Ax: n1 = 0.4275 + e−δn n px = 0.4275 + e−0.1n . Moreover Āx:n 1 =
bi

lM
0.045 −0.1n −0.1n
(1 − e ) = 0.4275 then e = 0.05. Henceforth Ā = 0.4275 + 0.05 = 0.4775.
ah

0.1 x:n ica

d

Exercise 3.4.10 Use the i = 0.06 and the Illustrative Life Table data to calculate the APV’s of the
ed

at

following:
m

m
he

1. A whole–life insurance issued to (27) in the amount of $125, 000.

at

2. A whole–life insurance issued to (67) in the amount of $125, 000.

lM

3. A whole–life insurance in the amount of $100, 000 issued to (30) which is deferred 20 years.
r ia

4. A twenty–year term life insurance in the amount of $75, 000 issued to (45).
t ua
Ac

NOT DIFFICULT
1
Exercise 3.4.11 You are given µx = 110−x
for 0 ≤ x < 110 and δ = 0.05

1
1. Ā20:30

2. 10| Ā20

1
3. Using the Illustrative Life Table with i = 0.06, find A40:7

Exercise 3.4.12
 88

1. Marwa, aged 20, is subject to a constant force of mortality, µx = 0.12. Marwa wants to buy a
3–year term insurance, with a 5000 benefit payable at the end of the year of death and δ = 0.08.
Determine the single premium for this insurance.

2. For a special whole life insurance on (0), you are given benefits are payable at the moment of
death such that.
 
200 for 0 ≤ t < 65 0.02 for 0 ≤ t < 65
bt = , δt = and µx = 0.06 for all x
100 for t ≥ 65 0.04 for t ≥ 65

i
Calculate the actuarial present value of this insurance.
hb
da

Solution:
Ed

1
1. The single premium is E [Z] = 5000 A20:3 and
ed

1
= v q20 + v 2 p20 q21 + v 3 2 p20 q22
m

A20:3
ha

= e−δ (1 − p20 ) + e−2δ p20 (1 − p21 ) + e−3δ 2 p20 (1 − p22 )

M

= e−0.08 1 − e−0.12 + e−0.16 e−0.12 1 − e−0.12 + e−0.24 e−0.24 1 − e−0.12 = 0.25982.

f.
o

The single premium for this insurance is then E [Z] = 5000 × 0.25982 = 1299.1.
sa
Pr

u.

2. The actuarial present value of the insurance is

ed
u.

I
200 Ā10:65 + 100 65| Ā0 = 200 Ā0 − 65| Ā0 + 100 65 E0 Ā65
ks

els
0.06 0.06
@

1 − e−65(0.02+0.06) + 100e−65(0.02+0.06)


= 200 = 149.26.

od
0.06 + 0.02 0.06 + 0.04
i
hb

lM
da

ica
ed

Exercise 3.4.13 A special term insurance policy pays 1000 at the end of the year of death for the first
at
m

10 years and 500 at the end of the year of death for the next 10 years. Mortality follows the Illustrative
m

Life Table with i = 0.06. Calculate the actuarial present value of a policy on (30).
he
at

Solution:
lM

The actuarial present value is

ia

1 1 1 1 1
E [Z] = 1000 A30:10 + 500 10| A30:10 = 500 A30:10 + 500 10| A30:10 + 500 A30:10
ar

1 1

1 1


= 500 A30:10 + 10| A30:10 = 500 A30:20 + A30:10
tu

= 500 A30 − 20| A30 + A30 − 10| A30 = 500 (2 A30 − 20 E30 A50 − 10 E30 A40 )
Ac

= 500 (2 × 0.10248 − 0.29374 × 0.24905 − 0.54733 × 0.16132) = 21.75439.

Exercise 3.4.14
For a special whole life insurance on (x) payable at the moment of death, you are given: (i) µx+t = 0.05
and i = e0.06 − 1
(ii) The death benefit at time t is bt = (1 + i)−0.5t for t > 0.

1. Calculate the present value of the death benefit.

 89

2. Calculate Var(Z).

Solution:

1. The present value random variable for this special insurance is given by

−0.5Tx
Z = v Tx bTx = e−δTx (1 + i)−0.5Tx = e−0.06Tx e0.06 = e−0.06Tx e−0.03Tx = e−0.09Tx .

This is the same as present value standard whole life insurance with a level benefit of 1 with
v = e−0.09 (new delta δ = 0.09).

2. The variance of a standard whole life insurance with a level benefit of 1 with v = e−0.09 with
i
hb
constant force of mortality
da

 2
Ed

2

2 µ µ
Var(Z) = Āx − Āx = −
µ + 2δ µ+δ
ed

 2
0.05 0.05
m

= − = 0.08984.
0.05 + 2 × 0.09 0.05 + 0.09
ha
M
f.

Exercise 3.4.15 For a 20–year term insurance of 1000 on a life currently age 40 with benefit payable
o

sa
Pr

at the end of the year of death, you are given:

u.

i) µx = 0.001(1.05)x , i = 0.05 and the actuarial present value of the insurance is 124.60.
ed
u.

1. Calculate the actuarial present value of a 21–year term insurance on the same life with benefit

I
ks

els
payable at the end of the year of death.
@

od
i

2. Let Z denotes the present value random variable for a whole life insurance of 1 payable at the
hb

lM
end of the year of death. Calculate Var(Z) given: k px = (0.94)k for all k and i = 0.07.
da

ica
ed

Exercise 3.4.16
at
m

1. Assume that the force of mortality µt = µ for all t ≥ 0, and the force of interest is constant.
he

Find Āx:10 given that e̊x = 25 and Āx = 0.4.

at

2. Assume i = e0.05 − 1. Calculate 10| Āx given that e̊x = 20.

lM
ia

Solution:
ar

1
tu

1. We know that Āx:10 = Āx:10

1 + Ax: 10 and Āx:10
1 = Āx − 10| Āx = Āx − 10 Ex Āx+10 . But under
Ac

CFM we know Ax = Ax+n for any n, thus Āx:10 = Āx − 10| Āx = Āx (1 − 10 Ex ), consequently,
1

µ
1 − e−10(µ+δ) + e−10(µ+δ)


Āx:10 = Āx (1 − 10 Ex ) + 10 Ex =
µ+δ
0.04
1 − e−10(0.1) + e−10(0.1) (µ = 0.04 and δ = 0.06)


=
0.1
= 0.62073.
 90

2. We know that
Z ∞ Z ∞
10| Āx = t
v t px µx+t dt = e−δt µe−µt dt
Z10∞ 10
µ −(µ+δ)10
= µe−(µ+δ)t dt = e
10 µ+δ
But Z ∞
1
e̊x = e−µt dt = = 20
0 µ
1
hence µ = 20
= 0.05 and δ = 0.05, and thus
i
hb
0.05 −0.1×10
10| Āx = e = 0.184
da

0.1
Ed
ed

Exercise 3.4.17
m

For an increasing 10–year term insurance, you are given:

ha

(i) bk+1 = 1000(1 + k), k = 0, 1, . . . , 9 and i = 0.05 (the first benefit is 1000)
M

(ii) Benefits are payable at the end of the year of death.

f.

(iii) The Net Single Premium for this insurance on (41) is 160.
o

sa
Pr

u.

1 1 1
1. Find the relation between (IA)40:10 and (IA)41:10 and the relation between A41:10 , A41 and A50 .
ed

1 1 1
2. Calculate A41:9 , (IA)41:10 and then (IA)40:10 using Illustrative Life Table,
u.

I
ks

els
3. Calculate the single premium for this insurance on (40).
@

od
i
hb

Solution:
lM
da

ica
1. We know from the recursion formula of an annually increasing 10–year term life insurance that
ed

at
m

1 1 1


(IA)40:10 = vq40 + vp40 A41:9 + (IA)41:9
m

− 10v 10 9 p41 q50

1 1


= vq40 + vp40 A41:9 + (IA)41:10
he
at

and
lM

1
A41:9 = A41 − 9 E41 A50 = A41 − v 9 9 p41 A50
ia
ar

ℓ50
= A41 − v 9 A50 .
tu

ℓ41
Ac

Finally

= v q40 + v p40 A41 − v 9 9 p41 A50 + (IA)41:10 − 10v 10 9 p41 q50

1 1


(IA)40:10
 
9 ℓ50 1 10 ℓ 50
= v q40 + v p40 A41 − v A50 + (IA)41:10 − 10v q50
ℓ41 ℓ41
 91

2. From the Illustrative Life Table we have

1 1 8950901
A41:9 = 0.16869 − × 0.24905 = 0.02662.
(1.06)9 9287264
1 1
and Statement (iii) says that 1000(IA)41:10 = 160, then (IA)41:10 = 0.160
 
1 0.00278 0.99722 10 8950901
(IA)40:10 = + 0.02662 + 0.160 − 0.00592
1.06 1.06 (1.06)10 9287264
= 0.14822

i
hb
3. The Net Single Premium for the annually increasing 10–year term life insurance on (40) is
1
1000(IA)40:10 = 148.22.
da
Ed

Exercise 3.4.18
ed

1. For a special whole life insurance on (x) payable at the moment of death, you are given:
m

(i) µx+t = 0.05 and δ = 0.08

ha

(ii) The death benefit at time t is bt = e0.06t for t > 0.

M

(a) Give the expression of the present value random variable Z for this insurance at issue.
f.

(b) Calculate Var(Z).

o

sa
Pr

u.

2. For a special discrete whole life insurance on (45) such that i = 6%, the death benefit is 1000
ed

until age 65, and 500 thereafter.

u.

I
Calculate the actuarial present value of the benefit payment using Illustrative Life Table.
ks

els
@

Solution:

od
i
hb

1. (a) The present value random variable for this special insurance is given by
lM
da

Z = v Tx bTx = e−δTx e0.06Tx = e−0.02Tx since δ = 0.08.

ica
ed

at
m

This is the same as present value standard whole life insurance with a level benefit of 1
m

with v = e−0.02 (new delta δ ′ = 0.02)

he

(b) The variance of a standard whole life insurance with a level benefit of 1 with v = e−0.02
at

with constant force of mortality

lM

 2
 2 2 µ µ
Var(Z) = E Z − (E [Z]) = −
ia

µ + 2δ µ+δ
ar

 2
0.05 0.05
tu

= − = 0.0453
0.05 + 2 × 0.02
Ac

0.05 + 0.02

2. The APV of benefits of this insurance can be written as

1000 A45 − 500 20| A45 = 1000 A45 − 500 20 E45 A65
From illustrative life table we have
1000 A45 − 500 20| A45 = 201.20 − 500 × 0.25634 × 0.4398 = 144.83.