THE UNIVERSITY OF HONG KONG

DEPARTMENT OF STATISTICS AND ACTUARIAL SCIENCE

STAT3909 Life Contingencies II (Spring 2026)

Example Class 2 Solutions

1. For a special whole life insurance of 100,000 on (40), you are given:

• The death benefit is payable at the moment of death.

• Level gross premiums are payable monthly for a maximum of 20 years.
• Mortality follows the Illustrative Life Table.
• 𝑖 = 0.06.
• Deaths are uniformly distributed over each year of age.
• Initial expenses are 200; renewal expenses are 4% of each premium including
the first.
• Gross premiums are calculated using the equivalence principle.

Calculate the monthly gross premium.

Solution: From the ILT, 𝐴40 = 0.16132, 𝑎¥40 = 14.8166, 𝑎¥60 = 11.1454, 20 𝐸 40 =
0.27414, 𝛼(12) = 1.00028 and 𝛽(12) = 0.46812. Hence

𝑎¥40:20 = 𝑎¥40 − 20 𝐸 40 𝑎¥60 = 11.7612;

𝑎¥ (12) = 𝛼(12) 𝑎¥40:20 − 𝛽(12)(1 − 20 𝐸 40 ) = 11.4247;
40:20
𝐴¯ 40 = 𝑖 𝐴40 /𝛿 = 0.16611.

The APV of benefits is 100000 × 0.16611 = 16611. The APV of expenses is

200+0.04𝐺 𝑎¥ (12) where 𝐺 is the annual gross premium, and the APV of premiums
40:20
is 𝐺 𝑎¥ (12) . Thus
40:20

16611 + 200 + 0.04𝐺 𝑎¥ (12) = 𝐺 𝑎¥ (12)

40:20 40:20
16811
=⇒ 𝐺 = = 1532.77,
0.96 × 11.4247
and the monthly premium is 𝐺/12 = 127.7.

2. For a fully discrete 30-year term insurance on (25) of 100,000, you are given:

• 𝑎¥45:10 = 8.2.
• 𝑖 = 0.03.
• 10 𝑝 45 = 0.96.
• Expenses are 25% of premium plus 50 at issue, plus 5% of premium for each
renewal premium.
• The gross premium is 260.

STAT3909 Example Class 2 1 Spring 2026

 Calculate the gross premium policy value at time 𝑡 = 20.
Solution: As follows:
20𝑉
𝑔
= 100000𝐴 1 + 0.05𝐺 𝑎¥45:10 − 𝐺 𝑎¥45:10
45:10
= 100000 × (1 − 𝑑 𝑎¥45:10 − 10 𝐸 45 ) − 0.95𝐺 𝑎¥45:10
 
0.03 × 8.2 −10
= 100000 × 1 − − 1.03 × 0.96 − 0.95 × 260 × 8.2
1.03
= 2658.0890.

3. For a special fully discrete 20-year endowment insurance on (55), you are given:
• Death benefits in year 𝑘 are given by 𝑏 𝑘 = 21 − 𝑘, for 𝑘 = 1, 2, . . . , 20.
• The endowment benefit at the end of year 20 is 1.
• Annual net premiums are level.
• 10𝑉
𝑛 = 5.0; 19𝑉 𝑛 = 0.6.
• 𝑞 65 = 0.2.
• 𝑖 = 0.05.
Calculate the net premium policy value at the end of year 11.
Solution: We need to first find out the premium. Using the recursion formula
between times 19 and 20, we have
( 19𝑉 𝑛 + 𝑃) (1 + 𝑖) = 𝑞 74 𝑏 20 +𝑝 74 20𝑉 𝑛
|{z} |{z}
=1 =1
=⇒ (0.6 + 𝑃) × 1.05 = 1
=⇒ 𝑃 = 0.3524.
Now we can use the recursion between times 10 and 11:
( 10𝑉 𝑛 + 𝑃) (1 + 𝑖) = 𝑞 65 𝑏 11 + 𝑝 65 11𝑉 𝑛
=⇒ (5 + 𝑃) × 1.05 = 0.2 × 10 + 0.8 × 11𝑉 𝑛
=⇒ 11𝑉 𝑛 = 4.525.

4. For a fully continuous whole life insurance of 1,000 on (𝑥), you are given:
• Benefit premiums are 10 per year.
• 𝛿 = 0.05.
• 𝜇𝑥+20.2 = 0.026.
• 𝑑
𝑑𝑡 𝑡 𝑉 equals 20.5 at 𝑡 = 20.2.
Calculate 20.2𝑉.
Solution: This question involves a direct use of Thiele’s differential equation:
𝑑
𝑡 𝑉 = 𝐺 𝑡 (1 − 𝑐 𝑡 ) − 𝑒 𝑡 + 𝛿𝑡 · 𝑡 𝑉 − (𝑆 𝑡 + 𝐸 𝑡 − 𝑡 𝑉)𝜇𝑥+𝑡
𝑑𝑡
=⇒ 20.5 = 10 + 0.05 × 20.2𝑉 − (1000 − 20.2𝑉) × 0.026 at 𝑡 = 20.2
=⇒ 20.2𝑉 = 480.2632.

STAT3909 Example Class 2 2 Spring 2026

 5. For a special fully continuous 10-year increasing term insurance, you are given:

• The death benefit is payable at the moment of death and increases linearly from
10,000 to 110,000.
• 𝜇 = 0.01 for all ages.
• 𝛿 = 0.05.
• The annual premium rate is 450.
• Premium-related expenses equal 2% of premium, incurred continuously.
• Claims-related expenses equal 200 at the moment of death.
• Your estimate of 9.8𝑉, based on the estimate of 9.6𝑉 and using Euler’s method
(forward approximation) with step size 0.2, is 126.88.

Calculate the estimate of 9.6𝑉.

Solution: By the forward Euler’s approximation,

9.8𝑉− 9.6𝑉
≈ 450 × 0.98 + 0.05 9.6𝑉 − (106000 + 200 − 9.6𝑉) × 0.01
0.2
126.88 − 9.6𝑉
≈ −621 + 0.06 9.6𝑉
0.2
=⇒ 9.6𝑉 ≈ 248.1028.

6. [STAT3909 Spring 2016 Exam Q.1] For a 10-payment, fully discrete, 20-year term
insurance of 1,000 payable at the end of the year of death on (40), you are given:

• 𝑖 = 0.06.
• Mortality follows the Illustrative Life Table.
• The following expenses are incurred at the beginning of each policy year:

Year 1 Year 2+
% of premium Constant % of premium Constant
Taxes 4% 0 4% 0
Sales Commission 25% 0 5% 0
Policy Maintenance 0% 10 0% 5

(a) Calculate the expense-loaded premium using the equivalence principle.

[7 marks]
(b) Calculate the net premium policy value and the gross premium policy value at
the end of year 9. [8 marks]
[Total: 15 marks]

Solution:

(a) We calculate that

𝑎¥40:10 = 𝑎¥40 − 𝑎¥50 10 𝐸 40 = 14.8166 − 13.2668 × 0.53667 = 7.6967;

STAT3909 Example Class 2 3 Spring 2026

 𝐴1 = 𝐴40 − 𝐴60 20 𝐸 40 = 0.16132 − 0.36913 × 0.27414 = 0.06013;
40:20
1− 𝐴1 − 20 𝐸 40 1 − 0.06013 − 0.27414
40:20
𝑎¥40:20 = = = 11.7613.
𝑑 0.06/1.06
The equation of value is as follows:

0.91𝐺 𝑎¥40:10 − 0.2𝐺 − 5𝑎¥40:20 − 5 = 1000𝐴 1

40:20
=⇒ 6.8040𝐺 − 63.8064 = 60.1267
𝐺 = 18.215.

(b) The net premium is 1000𝐴 1 /𝑎¥40:10 = 7.812. The net premium policy
40:20
value at 𝑡 = 10 is

10𝑉
𝑛
= 1000𝐴 1 = 1000 × (0.24905 − 0.36913 × 0.51081) = 60.4947.
50:10

Thus

1.06(9𝑉 𝑛 + 𝑃) = 1000𝑞 49 + 𝑝 49 10𝑉 𝑛 = 0.00546 × 1000 + (1 − 0.00546) × 10𝑉

𝑛

=⇒ 9𝑉 𝑛 = 54.10.

Meanwhile, the gross premium policy value at 𝑡 = 10 is

10𝑉
𝑔
= 1000𝐴 1 + 5𝑎¥50:10
50:10
= 60.4947 + 5 × (13.2668 − 11.1454 × 0.51081)
= 98.3628.

Thus

1.06(9𝑉 𝑔 + 0.91𝐺 − 5) = 1000𝑞 49 + 𝑝 49 10𝑉 𝑔

𝑔
= 0.00546 × 1000 + (1 − 0.00546) × 10𝑉
𝑔
=⇒ 9𝑉 = 85.86.

STAT3909 Example Class 2 4 Spring 2026