Life Insurance Premium calculation

Gross Premium = Net Premium + Loading

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 Life Insurance Premium calculation

Net Premium can be:

Net single premium: Is the net premium to be paid as a single lump
sum at the beginning of the contract
The present value of the future death benefits

Net single premium =

PV of future death claims
Number of insureds

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 Life Insurance Premium calculation

Net Level Premium : A premium charge that doesn't change from

year to year throughout the term of the policy

Net Single Premium

NLP = PV of Birr 1 Premium
Payment per insurance

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 Life Insurance Premium calculation

Premium calculation for term life insurance

Illustration: Assume that the living at age 50 is 750000. The mortality rate
is given as follows:

Mortality rate,
Age Number of Number of
Year

living dying

1 50 750,000 1842
2 51 748,158 2067
3 52 746,091 2172
4 53 743,919 3014

Assume all people at age 50 purchased a 4-year term insurance for Br. 8000. Annual premium
is to be paid at the beginning of the year and the death claims are to be paid at the end of
the year in which death occurred. Interest rate is 10%. Determine:
a. NSP and show amortization
b. NLP

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 Life Insurance Premium calculation

Expected death claims

Age Number of Policy Amount Expected Annual
Year

Dying death claims

1 50 1842 8,000 14,736,000

2 51 2067 8,000 16,536,000
3 52 2172 8,000 17,376, 000
4 53 3014 8,000 24,112,000
Total expected death claims Br.72,760,000

1 2 3 4 = (2*3) 5 6 = (4/5)
Year Expected Annual PV Factor PV of Annual No. of Annual net
Death Claims at 10% Claims Insured Premium
1 14,736,000 0.9091 13,396,497.6 750,000 17.862
2 16,536,000 0.8264 13,665,350.4 750,000 18.220
3 17,376, 000 0.7513 13,054,588.8 750,000 17.406
4. 24,112,000 0.6830 16,468,496 750,000 21.958
72,760,000 56,584,932.8 75.446

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 Life Insurance Premium calculation

Net Single premium Per insurance = PV of future death claims

Number of insureds

56,584,932.8
750,000
= 75.44

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 Life Insurance Premium calculation

Net Single Premium

NLP = PV of 1 Premium
Payment per insurance

Year Age No. of Insured PV of Br.1payable at PV of Birr.1

beginning of year premium
1 50 750,000 1 750,000
2 51 748,158 0.9091 680,150.44
3 52 746,091 0.8264 616,569.60
4 53 743,919 0.7513 558,906.34
Total 2,605,626.38

PV of 1 Premium 2,605,626.38
Payment per insurance =
750,000

= 3.47

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 Life Insurance Premium calculation

Net Single Premium

NLP = PV of 1 Premium
Payment per insurance

75.44
NLP = 3.47

= 21.47

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 Life Insurance Premium calculation

Premium calculation for pure endowment

Illustration: Assume that the living at age 60 are808,592. The mortality rate is
given as follows:
Mortality rate,
Age Number of Number of
Year

living dying

1 60 808,592 13,002
2 61 795,590 13,954
3 62 781,636 15,000
4 63 766,636 16,145
5 64 750,491 17,367
6 65 733,124

Assume all people at age 60 purchased a 5-year pure endowment for Br. 1000. Annual premium is to be
paid at the beginning of the year and the death claims are to be paid at the end of the policy
period. Interest rate is 10%. Determine:
a. NSP and show amortization
b. NLP

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 Life Insurance Premium calculation

NSP = Sum Assured * probability of survivals * present value factor

= 1000 * 0.90667 * 0.6209
= 583.95

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 Life Insurance Premium calculation

Net Single Premium

NLP = PV of 1 Premium
Payment per insurance

Year Age No. of PV of Br.1payable at PV of Birr.1

Insured beginning of year premium
1 60 808,592 1 808,592
2 61 795,590 0.9091 723,271
3 62 781,636 0.8264 645,944
4 63 766,636 0.7513 575,974
5 64 750,491 0.6830 512,585
Total 3,266,366

PV of 1 Premium 3,266,366
Payment per = 808,592
insurance
= 4.0396

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 Life Insurance Premium calculation

Net Single Premium

NLP = PV of 1 Premium
Payment per insurance

583.95
NLP = 4.0396
= 139.30

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 Life Insurance Premium calculation

Expected death claims

Age Number of Policy Amount Expected Annual
Year

Dying death claims

1 60 13002 1000 13,002,000

2 61 13954 1000 13,954,000
3 62 15000 1000 15,000,000
4 63 16145 1000 16,145,000
5 64 17367 1000 17,367,000
Total expected death claims Br.72,760,000

1 2 3 4 = (2*3)
Year Expected Annual PV Factor at PV of Annual
Death Claims 10% Claims
1 13,002,000 0.9091 11,820,118.2
2 13,954,000 0.8264 11,531,585.6
3 15,000,000 0.7513 11,269,500
4. 16,145,000 0.6830 11,027,035
5 17,367,000 0.6209 10,738,170.3
72,760,000 56,431,409.1

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 Life Insurance Premium calculation

Yea Ag Probabilit Sum assured PV factor NSP

r e y of dying
1 60 0.01608 1000 0.9091 14.62
2 61 0.01726 1000 0.8264 14.26
3 62 0.01854 1000 0.7513 13.93
4 63 0.01996 1000 0.6830 13.63
5 64 0.02148 1000 0.6209 13.34
Total 69.78

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 Life Insurance Premium calculation

Net Single premium Per insurance = PV of future death claims

Number of insureds

56,431,409.1
808,592
= 69.8
NSP = 583.95 + 69.8
= 653.75

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