Chapter 4

Chapter 4: Life Annuities
1. Discrete Whole Life Annuity-Due

▶ A life annuity is an ongoing series of payments made while someone remains
alive. A life annuity-due is an annuity with annual payments paid at the start
of each year and payable over some period related to an individual’s lifetime.
▶ Whole Life Annuity-Due of 1 Per Year: We can describe the actuarial present
value of a life annuity-due by considering the present value of the “average”
amount an insurer will have to pay. The present value of the total expected
payment by the insurer is
∞
X
lx + vlx+1 + v 2 lx+2 + · · · + v k lx+k + · · · = v k lx+k .
k=0
The present value per individual annuity is

∞ ∞
1 X lx+k X
( )(lx + vlx+1 + v 2 lx+2 + · · · + v k lx+k + · · · ) = vk = v k k px .
lx lx
k=0 k=0
This is the actuarial present value of

Pthe whole life annuity-due, and it is
∞
denoted äx . The formulation äx = k=0 v k k px may be referred to as the
current payment form of the annuity. This life annuity is a sum of a series of
pure endowments, one for each integer year.
▶ The annuity can also be considered from a stochastic point of view, with äx
being the expected value of a present value random variable. This annuity
pays 1 at the start of each year as long as (x) lives. If (x) survives K
complete years and dies in the K + 1-st year, then there will be K + 1
payments made (at times 0, 1, . . ., K ). The PVRV is
1 − v K +1 1 − e −δ(K +1)
Y = 1 + v + v 2 + · · · + v K = äK +1| = = .
d d
Note that Y is a discrete random variable and
APV = E[Y ] = äx = ä1̄| · qx + ä2̄| · 1| qx + ä3̄| · 2| qx + · · · + äk+1| · k| qx + · · ·
∞
X
= E[äK +1| ] = äk+1| k px qx+k
k=0
∞
X X∞
= v k k px = k Ex = 1 + vpx + v 2 2 px + · · · .
k=0 k=0
▶ As k goes larger, so does äk+1| and as k → ∞, the limit is ä∞| = d1 .

▶ There is an algebraic relationship linking the PVRV of the discrete whole life
annuity-due and the PVRV of the whole life insurance payable at the end of
the year of death. Recall that the PVRV for the whole life insurance of 1
payable at the end of the year of death is Z = v K +1 . We have
1 − v K +1 1−Z
Y = äK +1| = = ,
d d
1−Ax
we have äx = E[Y ] = E[ 1−Z d ]= d , so Ax = 1 − d äx . Also,
Var[Y ] = d12 Var[Z ] = d12 [ 2Ax − (Ax )2 ] = d2 (äx − 2äx ) + 2äx − (äx )2 .
▶ The current payment representation is most convenient when considering a

life annuity with payments that are varying. Suppose a life annuity-due issued
to (x) has payment ck at age x + k, if alive. The actuarial present value in
current payment form is
∞
X
c0 + c1 vpx + c2 v 2 2 px + · · · = ck v k k p x .
k=0
▶ Example: Suppose the survival model is S0 (t) = 1 − 100 t

for 0 ≤ t ≤ 100 and
2
i = 0.08. Find ä90 , ä90 and Var[Y ], where Y is the PVRV for a whole life
annuity-due of 1 issued to (90).
▶ Solution: First we know that k p90 = 100−90−k 10−k
100−90 = 10 . So, we have
∞ 9
X X 10 − k 1
ä90 = v k k p90 = vk( )= (10 + 9v + 8v 2 + · · · + v 9 )
10 10
k=0 k=0
1 1 10 − a10|0.08 1 10 − 6.710
= (D ä)10|0.08 = = = 4.44.
10 10 d 10 0.0741
Similarly, we have
∞ 9
2
X X 10 − k 1
ä90 = v 2k k p90 = v 2k ( )= (10 + 9v 2 + 8v 4 + · · · + v 18 )
10 10
k=0 k=0
2
1 2 1 10 − a10|0.08 1 10 − 4.720
= D ä10|0.08 = = = 3.70.
10 10 2d − d 2 10 0.1427
We also get
2
Var[Y ] = [ä90 − 2ä90 ] + 2ä90 − (ä90 )2 = 3.97.
d
2. Discrete Life Annuity-Due
▶ n-Year Temporary Life Annuity-Due of 1 per Year: The first payment is made
at age x and the latest possible payment is made at age x + n − 1 if (x) is
still alive. Therefore, we have
1
APV = EPV = äx:n̄| = ( )(lx + vlx+1 + v 2 lx+2 + · · · + v n−1 lx+n−1 )
lx
n−1 n−1
X lx+k X
= vk = v k k px = 1 + vpx + v 2 2 px + · · · + v n−1 n−1 px .
lx
k=0 k=0
The n-year temporary life annuity due ends either when (x) dies or when n
years expire, whichever is first. The subscript x : n̄| indicates that the benefit
ends on the first expiry of (x) or n years. This is similar to the endowment
insurance which pays 1 at the death of (x) or at the end of n years, whichever
occurs first. The PVRV is
( K +1
1 − v min(Kx +1,n) äK +1| = 1−vd , for 0 ≤ Kx ≤ n − 1,
Y = = n
d än̄| = 1−v
d , for Kx ≥ n.
Pn−1
The APV is E[Y ] = äx:n̄| = k=0 äk+1| k px qx+k + än̄| n px .
▶ As in the whole life annuity-due case, for the n-year temporary life
annuity-due we have a relationship linking the PVRV Y with the
PVRV Z of a related insurance. The related insurance is discrete
min(Kx +1,n)
n-year endowment insurance. We have Y = 1−v d = 1−Z
d ,
where Z is the PVRV for discrete n-year endowment insurance, so
1−A
E[Y ] = 1−E[Z
d
]
= d x:n̄| . We also have
Var[Y ] = d12 [ 2Ax:n̄| − (Ax:n̄| )2 ] = d2 (äx:n̄| − 2äx:n̄| ) + 2äx:n̄| − (äx:n̄| )2 .
▶ Relationship between the present value and the final value:
äx:n̄| = v n n px s̈x:n̄| .
▶ n-Year Deferred Life Annuity-Due: For the n-year deferred life

annuity-due, the first payment occurs at age x + n if (x) is still alive
then, and the payments continue annually for life. The notation and
currentPpayment form for the actuarial present value are
∞ k
ä
n| x = k=n v k px . The PVRV is

0, for 0 ≤ K < n,
Y = Yw − Yt =
äK +1| − än̄| = v n äK +1−n , for K ≥ n.
where Yw and Yt are PVRVs of whole lifePand n-year temporary

∞
annuities-due. Moreover, E[Y ] = n|äx = k=n n|äk+1−n| · k| qx . The
most frequently used formulations for the deferred annuity are
n|äx = äx − äx:n̄| = v n n px äx+n .

▶ For the deferred annuity, there is no convenient link between Y and
an appropriate insurance PVRV Z . The best we can do is
Y = Yw − Yt = (1−Zw )−(1−Z
d
e)
= Ze −Z
d
w
, where Ze is for endowment
insurance and Zw is for life insurance. The variance is
2 2n
Var[Y ] = E[Y 2 ] − (E[Y ])2 = v n px (äx+n − 2äx+n ) + 2n|äx − ( n|äx )2
d
▶ n-year Certain and Life Annuity-Due: For this annuity, the first n
payments (made at times 0, 1, . . ., n − 1) will be made no matter
when (x) dies, and the annuity continues with payments at time n
and later as long as (x) is alive. The present value of the first n
payments is än̄| , an n-payment certain (non-life-contingent annuity
due). The remaining payments continuing from time n and later
form an n-year deferred life annuity. Therefore, the n-year certain
and life annuity-due is the sum of the n-year certain annuity-due and
the n-year deferred life annuity-due. This annuity may also be
referred to as n-year guaranteed annuity-due.
▶ The current payment representation for APV is
Pn−1 P∞
än̄| + n|äx = k=0 v k + k=n v k k px . A notation for this APV is
äx:n̄| = än̄| + n|äx . The PVRV is

än̄| , for 0 ≤ K < n,
Y = än̄| + Yd =
äK +1| , for K ≥ n,
where Yd is PVRV Pfor n-year deferred annuity and

∞
E[Y ] = än̄| n qx + k=n äk+1| k px qx+k .
▶ Annuity Immediate: An annuity-immediate refers to a discrete
annuity with payments at the end of each year over a period of time.
It is usually possible to formulate an annuity-immediate in terms of
some related annuity-due, payments start and end one year later
than the corresponding annuity-due.
▶ Whole life annuity-immediate of 1 per year has first payment made

at age x + 1 and continues for life. Y = aK̄ | = äK +1 − 1 = Yad − 1,
where Yad is the PVRVP for the whole life
P∞annuity-due. We have
E[Y ] = ax = äx − 1 = ∞ k
k=1 v k px = k=1 ak̄| k px qx+k and
Var[Y ] = Var[Yad ].
▶ n-year temporary life annuity-immediate has first payment at age

x + 1 and final payment at age x + n. We have Y = Yad,n+1 − 1,
where Yad,n+1 denotes PVRVPof an n + 1 year annuity-due and
E[Y ] = ax:n̄| = äx:n+1 − 1 = nk=1 v k k px = äx:n̄| + n Ex − 1 and
Var[Y ] = Var[Yad,n+1 ].
▶ Annuity Immediate (cont.):

▶ n-year deferred life annuity-immediate has first payment at age
x + n + 1, and continues as long as (x) survives. This annuity is the
same as an n + 1-year deferred annuity due and
n n+1
n|ax = n+1|äx = v n px ax+n = v n+1 px äx+n+1 .
3. Continuous Life Annuity
▶ A continuous life annuity is an annuity with payments spread continuously
throughout the year and payable over some period related to an individual’s
lifetime. In the formulations that follow, we will make use of the present value
of the compound interest continuous annuity-certain of 1 per year for m years
Rm m −mδ
and ām̄| = 0 v t dt = 1−v
δ = 1−eδ where δ is the force of interest.
▶ Continuous Whole Life Annuity of 1 per Year: Payment is made at a

continuous rate of 1 per year starting at age x and continuing until (x) dies;
this is a length of time of Tx years. The PVRV at the time the annuity begins
is
1 − v Tx 1 − e −δTx
Y = āT̄x | = = .
δ δ
We have
Z ∞
APV = E[Y ] = āx = āt̄| t px µx+t dt.
0
Applying
R ∞ the integration by R ∞parts, we have R ∞
āx = 0 āt̄| t px µx+t dt = 0 āt̄| d(−t px ) = 0 v t t px dt.
T
▶ The relationship āT̄ | = 1−v
δ links the PVRV’s for continuous whole
life annuity and insurance payable at the moment of death, and this
relationship results in important algebraic relationships between
annuity and insurance APV’s and variances. We have
1 − vT 1 − Āx
āx = E[Y ] = E[ ]=
δ δ
and
1 − vT 1 1
Var[āT̄ | ] = Var[ ] = 2 Var[v T ] = 2 [ 2Āx − (Āx )2 ].
δ δ δ
▶ Constant Force Model µx+t = µ for all t > 0: This model has arisen
frequently in exam questions. We have
Z ∞ Z ∞
−δt 1
āx = e · t px dt = e −δt e −µt dt = .
0 0 δ+µ
▶ n-Year Temporary Life Annuity: The annuity pays for a maximum of n years.
The maximum present value of the annuity is ān̄| , which occurs if the
individual survives the n-year term.
( T
āT̄ | = 1−v
δ n, for 0 < T < n,
PVRV = Y =
ān̄| = 1−v
δ , for T ≥ n.
We have
Z n Z n
APV = E[Y ] = āx:n̄| = v t t px dt = āt̄| t px µx+t dt + ān̄| n px .
0 0
▶ We have Y = 1−Z δ where Y represents n-year temporary annuity and Z

represents n-year endowment insurance. So we have
1 − E[Z ] 1 − Āx:n̄|
āx:n̄| = E[Y ] = =
δ δ
and
1 1
Var[Y ] = Var[Z ] = 2 [ 2Āx:n̄| − (Āx:n̄| )2 ]
δ2 δ
1 2
= 2 [1 − 2δ 2āx:n̄| − (1 − δ āx:n̄| )2 ] = (āx:n̄| − 2āx:n̄| ) − (āx:n̄| )2 .
δ δ
▶ Under the assumption of the constant force model µx+t = µ, we have
Rn −(δ+µ)n
āx:n̄| = 0 e −δt e −µt dt = 1−eδ+µ .
▶ n-Year Deferred Whole Life Annuity: If (x) survives to time n, then a life
annuity begins at age x + n and continues until death. We have

0, for 0 < T < n,
PVRV = Y = Yw − Yt =
āT̄ | − ān̄| = v n āT −n , for T ≥ n.
where Yw and Yt represent PVRV’s for whole life and n-year temporary
annuities.
▶ We have E[Y ] = n|āx = n∞ v t t px dt = n∞ v n āt−n| t px µx+t dt and

R R
n
n|āx = v n px āx+n = āx − āx:n̄| .
▶ Although the PVRV’s of the whole life annuity and the n-year
temporary annuity both satisfy the relationship Y = 1−Z
δ , the n-year
deferred annuity PVRV does not satisfy this relationship. We can
write Y = Yw − Yt = Ze −Z
δ
w
, where Ze and Zw are the PVRV’s for
n-year endowment insurance and whole life insurance, so that
Ā −Ā E − Ā
= āx − āx:n̄| = x:n̄|δ x = n x δ n| x .
n|āx
For the variance of Y , we either use
Z ∞
2 2n
Var[Y ] = v 2n āt−n|
2 2 2
t px µx+t dt − ( n|āx ) = v n px (āx+n − āx+n ) − ( n|a
n δ
or
Ze − Zw 1
Var[Y ] = Var[ ] = 2 (Var[Ze ] + Var[Zw ] − 2Cov[Ze , Zw ]).
δ δ
n
The range for Y is 0 ≤ Y < vδ with the minimum PV of 0
occurring if death occurs before time n and the maximum occurring
if (x) lives forever.
▶ n-Year Certain and Life Annuity: The PVRV is

ān̄| , for 0 < T ≤ n,
PVRV = Y = ān̄| + Yd =
āT̄ | , for T > n.
where Yd is the PVRV for the n-year deferred annuity. If (x) dies
within n years, the annuity continues to time n (this the first n years
of payment are guaranteed, or certain, and the minimum PV is ān̄| ).
If (x) survives beyond n years, the annuity continues until death.
This annuity is the combination of an n-year annuity-certain and an
n-year deferred annuity. We have
Z ∞ Z ∞
t
APV = E[Y ] = ān̄| + v t px dt = āx:n̄| = ān̄| n qx + āt̄| t px µx+t dt.
n n
▶ Example: For a 5-year certain and life annuity of 1 on (x), payable

continuously, you are given: (i) Y is the present value random
variable; (ii) FY is the distribution function for Y ; (iii) µx+t = 0.01,
t ≥ 0; (iv ) δ = 0.04. Compute FY (30) − FY (5).
▶ Solution: We know that Y = ā5| for 0 < T ≤ 5 and Y = āT | for

−5δ
T > 5. Also, we have 4.53 = 1−eδ = ā5| ≤ Y ≤ ā∞| = δ1 = 25.
We get FY (30) = P(Y ≤ 30) = 1. For FY (5), we first find the value
of t such that āt| = 5. Then we have P[Y ≤ 5] = P[T ≤ t] = t qx as
the present value of the annuity will be small if (x) dies early. Note
−0.04t
that āt| = 1−e0.04 = 5, it follows that t = 5.58. Then we have
FY (5) = 5.58 qx . As the force of mortality is constant, we have
−5.58µ
5.58 qx = 1 − 5.58 px = 1 − e = 1 − e −0.558 = 0.054. We get
FY (30) − FY (5) = 1 − 0.054 = 0.946.
▶ Recursion Relationships for Annuities: The following equations
summarize the recursive relationships for main annuity types that we
know. The derivations are similar to those for insurance
relationships.
▶ äx = 1 + vpx äx+1 = äx:m̄| + v m m px äx+m
▶ äx:n̄| = 1 + vpx äx+1:n−1|
▶ āx = āx:1̄| + vpx āx+1 = āx:m̄| + v m m px āx+m
▶ āx:n̄| = āx:1̄| + vpx āx+1:n−1|
▶ ax = vpx + vpx ax+1

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Chapter 4

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Chapter 4: Life Annuities

1. Discrete Whole Life Annuity-Due

The present value per individual annuity is

This is the actuarial present value of

▶ As k goes larger, so does äk+1| and as k → ∞, the limit is ä∞| = d1 .

▶ The current payment representation is most convenient when considering a

▶ Example: Suppose the survival model is S0 (t) = 1 − 100 t

▶ n-Year Deferred Life Annuity-Due: For the n-year deferred life

where Yw and Yt are PVRVs of whole lifePand n-year temporary

n|äx = äx − äx:n̄| = v n n px äx+n .

where Yd is PVRV Pfor n-year deferred annuity and

▶ Whole life annuity-immediate of 1 per year has first payment made

▶ n-year temporary life annuity-immediate has first payment at age

▶ Annuity Immediate (cont.):

▶ Continuous Whole Life Annuity of 1 per Year: Payment is made at a

▶ We have Y = 1−Z δ where Y represents n-year temporary annuity and Z

▶ We have E[Y ] = n|āx = n∞ v t t px dt = n∞ v n āt−n| t px µx+t dt and

▶ Example: For a 5-year certain and life annuity of 1 on (x), payable

▶ Solution: We know that Y = ā5| for 0 < T ≤ 5 and Y = āT | for

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