MASTER EN CIENCIAS ACTUARIALES Y FINANCIERAS
SEGUROS DE VIDA
TUTORIAL 3
1. Explain the meaning and obtain the values of the following actuarial functions. Use life table
A1967:70 as the mortality basis and i ! 4%.
a. ä "12#
18:20!
b. 45| ä "12#
20
c. "Iä# 22
d. "IA# 1
19:5!
e. "IA# 1
20:3!
f. "IA# 20:6!
g. "Iä# 19:10!
2. Find the value of the following actuarial symbols using life table ELT:12 and i ! 4%. Explain
in a few word the meaning of the functions
!
a. 27| A 30
o
b. e 18
o
c. 65 " e 65
!
d. A 22:10!
!
e. "I A# 18:4!
f. ä 22:2!
3. Using life table A1967:70 as the mortality basis, find the following level net premiums. Write
a few words explaining the meaning of each of the symbols before the calculations
a. P"A 18:4! #
b. 5 P"A 1 #
20:10!
!
c. P A 18
!
d. 10 P A 18
"12#
e. 5P "A 18:8! #
"12# "12#
f. 25 P 25| ä 40
"12#
g. P 18| ä 20
4. A person aged 20 wants to buy an insurance police that provides £5,000 at his/her death. This
person has decided to pay the level net premiums during 10 years in monthly payments
(starting at issue). Use A1967:70 and 4% effective annual rate of interest.
a. How much are the monthly equal payments required to buy the insurance coverage?
SOLUTION
Question 1
Remember that the symbols requested are all Single Net Premiums of Insurance or Annuities,
in other words, expected values of the present values of random variables.
a) The first case is indeed the expected value (or Net Single Premium) of the random variable:
present value of a 20-year temporary annuity-due paid monthly (1/12) issued for a person now
aged 18.
ä "12# "12# D 38 ä "12# ! ä ! 11 ! D 38 ä ! 11
18:20! ! ä 18 ! D 28 18
24 D 18 38
24
18
! 22. 752 ! 11 ! 7575. 028 " 19. 386 ! 11
24 16859. 584 24
! 13. 789
Remember that assuming linear interpolation for V k"s s p x"k
ä "m#
x # äx ! m ! 1
2m
b) The second function is the Net Single Premium or the expected value of the random
variable: present value of a 45-year deferred perpetuity-due paid monthly (1/12) for a person aged
20
"12#
45| ä 20 ! ! D 65 ä 65 !
"12#
45 E 20 ä 65
11
D 20 24
! 2144. 1713 " 10. 737 ! 11 ! 1. 4166
15557. 436 24
Mind the effect of the financial-actuarial discount factor 45 E 20 .
c) The next symbol is the Net Single Premium or the expected value of the random variable:
present value of an increasing perpetuity-due issued for a person aged 22
S
"Iä# 22 ! 22 ! 5893433. 5 ! 410. 44
D 22 14358. 839
See how large is the final figure!!
d) The next one is just the Net Single Premium or the expected value of the random variable:
present value of an increasing 5-year term discrete (payable at the end of the year of death)
insurance for a life aged 19.
Let us remember the triangle
$ $ $
$ $ $ $
$ $ $ $ "IA# x"n
$ $ $ $ $ $
$ $ $ $ $ $ $
$ $ $ $ $ $ $ n A x"n
"IA# x:n!
1 $ $ $ $ $ $ $ $ $
"IA# x
and the formula
"IA# x:n!
1 ! "IA# x ! D x"n "IA# x"n ! n D x"n A x"n
Dx Dx
R ! R ! n M
! x x"n x"n
Dx
In this particular case
"IA# 1 ! R 19 ! R 24 ! 5 M 24
19:5! D 19
! 99590. 395 ! 89274. 634 ! 5 " 2028. 7813
16194. 979
!2
! 1. 0612 # 10
Notice that, although increasing, the expected value or Net Single Premium, in other words the
price that you would pay all at once to get this insurance without expenses or company profits or
taxes is a small figure. Any sensible explanation for this fact?
e) Again we are facing an increasing insurance, in this case this is the Net Single Premium or
expected value of the random variable: present value of an increasing 3-year pure endowment
endowment for a person aged 20
"IA# 1 ! 3 D 23 ! 3 " 13795. 567 ! 2. 6603
20:3! D 20 15557. 436
Remember that it is exactly the same as the non-increasing case but considering that if the person
survives 3 years, then sum assured will be 3 instead of just 1.
f) This is the Net Single Premium or expected value of the random variable: present value of a
6-year increasing discrete endowment insurance (payable at the end of the year of death) for a
person aged 20. Remember first that an endowment insurance is the sum of a term insurance plus a
pure endowment,
"IA# 20:6! ! "IA# 1 " "IA# 1
20:6! 20:6!
! "IA# 20 ! D 26 "IA# 26 ! 6 D 26 A 26 " 6 D 26
D 20 D 20 D 20
! R 20 ! R 26 ! 6 M 26 " 6 D 26
D 20
! 97500. 494 ! 85226. 294 ! 6 " 2011. 0495 " 6 " 12237. 535
15557. 436
! 4. 733
g) The last symbol is an increasing annuity. It is the Net Single Premium or the expected value
of the random variable: present value of a 10-year temporary increasing annuity-due issued for a
person aged 19.
Remember the triangle
$ $ $
$ $ $ $
$ $ $ $ "Iä# x"n
$ $ $ $ $ $
$ $ $ $ $ $ $
$ $ $ $ $ $ $ n ä x"n
"Iä# x:n! $ $ $ $ $ $ $ $ $
"Iä# x
and the formula
D D
"Iä# x:n! ! "Iä# x ! x"n "Iä# x"n ! n x"n ä x"n
Dx Dx
! xS ! S x"n ! n N x"n
Dx
In our particular case
D
"Iä# 19:10! ! "Iä# 19 ! 29 "Iä# 29 ! 10 ä 29
D 19
S
! 19 ! S 29 ! 10 N 29
D 19
! 6945682. 1 ! 3935788. 8 ! 10 " 230592. 87
16194. 979
! 43. 468
Question 2
a) This is the Net Single Premium or the expected value of the random variable: present value
of a 27-year deferred continuous whole of life insurance (payable right after death) issued for a life
now aged 30,
! !
27| A 30 ! D 57 A 57
D 30
! 8929. 4 " 0. 54163 !. 16466
29372
Always notice the effect of the actuarial-financial factor.
b) This one is very easy. Remember that this is the expected continuous future lifetime of a
person aged 18; in other words, the average remaining time to live for a person of this age.
o
e 18 ! 52. 45
c) This one is also an easy case for us. This is the expected continuous age at death of a person
already aged 65.
o
65 " e 65 ! 65 " 11. 95 ! 76. 95
Then a person (male) at the age of retirement is expected to die at age 76.95 in average.
d) The next one is once again the Net Single Premium or the expected value of the random
variable: present value of a continuous 10-year endowment insurance (payable at the instant of
death, in case death occurs in the interval) issued for a person aged 22,
! ! !
A 22:10! ! A 1 " A 1
22:10! 22:10!
! !
! A 22 ! D 32 A 32 " D 32
D 22 D 22
! 0. 17038 ! 27092 " 0. 24175 " 27092
40535 40535
! . 67716
e) The next case is the Net Single Premium or expected value of the random variable: present
value of an increasing continuous (payable at the moment of death) 4-year endowment insurance
for a life of age 18, (remember that in life table ELT:12 we can only find continuous commutation
functions)
! ! !
"I A# 18:4! ! "I A# 1 " "I A# 1
18:4! 18:4!
! ! !
! "I A# 18 ! D 22 "I A# 22 ! 4 D 22 A 22 " 4 D 22
D 18 D 18 D 18
! ! !
! R 18 ! R 22 ! 4 M 22 " 4 D 22
D 18
! 315085. 1 ! 286954 ! 4 " 6906. 2 " 4 " 40535
47642
! 3. 4139
f) The last case is the Net Single Premium or the expected value of the random variable:
present value of a 2-year annuity-due for a person now aged 22,
D
ä 22:2! ! ä 22 ! 24 ä 24
D 22
Remember that in life table ELT:12 we cannot find the values of the discrete perpetuities-due.
We should remember the formula
1 ! d äx " Ax $ äx ! 1 ! Ax
d
and assuming U.D.D.
!
!
1 ! Ax ! ä ! 1 ! i Ax
äx ! x
d d
In our case
ä 22:2! ! ä 22 ! D 24 ä 24
D 22
! !
ln"1.04# ln"1.04#
1! A 1! A 24
! D 24
22
! 0.04
0.04
0.04
0.04
1.04
D 22 1.04
ln"1.04# ln"1.04#
1! " 0. 17038 37394 " 1 ! " 0. 18238
! 0.04
0.04
! 0.04
0.04
1.04
40535 1.04
! 1. 9603
Question 3
In this question we will be asked for level net premiums instead of Single Net Premiums.
Remember that level net premiums are obtain as a ratio of expected values
E%Benefit&
P"Benefit# !
E% annuity&
where the annuity in the denominator is the type of annuity chosen in order to pay the level net
premiums.
a) This is the level net premium of a 4-year endowment discrete (payable at the end of the year
of death) insurance issued for a life aged 18 and paid using a 4-year term annuity-due.
M 18 !M 22 "D 22
A 18:4! A 18 ! DD 2218 A 22 " DD 2218 D 18
P"A 18:4! # ! ! ! N 18 !N 22
ä 18:4! ä 18 ! DD 2218 ä 22 D 18
! M 22 " D 22
! M 18
N 18 ! N 22
! 2106. 061 ! 2049. 8455 " 14358. 839 ! 0. 2268
383591. 6 ! 320033. 83
Remember that when the symbol P has no previous subscript we assume that the level net
premiums are paid using an annuity-due similar in term as the insurance ( or annuity benefit)
considered.
b) The next one is the level net premiums of a 10-year discrete (payable at the end of the year
of death) term insurance for a person aged 20 and the level net premiums will be paid using just a
5-year annuity-due,
A1 A 20 ! D 30
A 30
5 P"A 1 #! 20:10!
! D 20
! M 20 ! M 30
20:10! ä 20:5! ä 20 ! D 25
ä 25 N 20 ! N 25
D 20
! 2075. 242 ! 1981. 9552 ! 1. 297 2 # 10 !3
350537. 04 ! 278624. 51
Remember that the Level Net Premium is the amount that we will pay at the beginning of each
year of payment (5 in this case and , of course, while we are still alive and kicking) to obtain the
coverage of the insurance.
c) The next one is the Level Net Premium of a whole of life continuous insurance (payable at
the instant of death) issued for a life aged 18 that will be paid in equal (level) annual (paid in
advance) amounts using an actuarial perpetuity-due,
!
!
0.04
A 18 0.04
" 0. 12492
P A 18 ! A 18 ! ln"1.04# ! ln"1.04#
ä 18 ä 18 22. 752
! 5. 5996 # 10 !3
As you can see the quantity to be paid every year in advance for this whole of life continuous
insurance is very little. Remember that the Net Single Premium in this very case is
!
A 18 ! 0. 04 " 0. 12492 !. 1274
ln"1. 04#
a much greater quantity. Bear in mind that in the Level Net Premium you will linger on paying until
you die, that is the reason it is so cheap compared with the Net Single Premium, in which you have
to pay all at once in a single payment.
d) This case is very interesting. It seems something alike the previous one, but there is a very
important difference: the Level Net Premiums will be only paid in exactly 10 payments at the
beginning of the next 10 years instead of being paid each and every year until death (as in the
previous one).
Subsequently, this is the Level Net Premium of a whole of life continuous (payable at the
instant of death) insurance to be paid using a 10-year annuity-due (mind the notation, the 10
subscript)
! 0.04
!
A 18 ln"1.04#
A 18
10 P A 18 ! !
ä 18:10! D
ä 18 ! D 2818 ä 28
0.04
ln"1.04#
" 0. 12492
!
22. 752 ! 16859.584 " 21. 408
11299.271
!2
! 1. 5159 # 10
You can easily realize that this figure is larger than in the previous case d) because the total
amount to be paid (Net Single Premium) will be done in a shorter period of time, just 10 years.
e) This case is most interesting. This is the Level Net Premium (annual basis) for an 8-year
discrete (payable at the end of the year of death, in case) endowment issue for a person aged 18 and
it will be paid using equal amounts (level) and a 5-year temporary annuity-due with monthly
payments,
D 26 D 26
"12# A 18:8! A 18 ! D 18
A 26 " D 18
5P "A 18:8! # ! !
ä "12#
18:5! ä "12#
18 !
D 23
D 18
"12#
ä 23
D 26
A 18 ! D 18
A 26 " DD 2618
! D 23
"ä 18 ! 11
24
#! D 18 "ä 23
! 11
24
#
! . 73149 !. 16117
4. 5385
where
A 18 ! D 26 A 26 " D 26
D 18 D 18
!. 12492 ! 12237. 535 ". 16433 " 12237. 535
16859. 584 16859. 584
!. 73149
! D 23 ä 23 ! 11
ä 18 ! 11
D 18
24 24
! 22. 752 ! 11 ! 13795. 567 " 22. 157 ! 11
24 16859. 584 24
! 4. 5385
SOMETHING VERY IMPORTANT:
The figure obtained is the level net premium on an annual basis, 0. 16117. The equal or level
monthly payments are
0. 16117 ! 1. 3431 # 10 !2
12
f) This case is also very important and interesting. First, be aware of something, NOT only an
insurance is a benefit. Remember that an annuity was also a benefit. This is reason why we can ask
ourselves for the Level Net Premium of annuities.
In this case, this is the Level Net Premiums of a 25-deferred perpetuity-due issued for a person
aged 40 with monthly payments that will be paid using a 25-year annuity-due using also monthly
payments. It seems very complicated but it is not so hard.
"12# D 65 "12#
"12# "12# 25| ä 40
ä
D 40 65
25 P 25| ä 40 ! !
ä "12#
40:25
"12# D 65 "12#
ä 40 ! D 40 ä 65
D 65
D 40 "ä 65
! 11
24
#
! D
"ä 40 ! 11
24
# ! D 6540 "ä 65 ! 11
24
#
! 3. 1545 !. 20643
"18. 894 ! 11
24
# ! 3. 1545
where
D 65 ä 65 ! 11 ! 2144. 1713 " 10. 737 ! 11
D 40 24 6986. 4959 24
! 3. 1545
SOMETHING VERY IMPORTANT AGAIN:
The figure obtained is the level net premium on an annual basis, 0. 20643. The equal or level
monthly payments are
0. 20643 ! 1. 7203 # 10 !2
12
This particular figure is the monthly payments that a person aged 40 ought to pay until his/her
retirement age (65) in order to receive later a monthly payment of 1/12. As an illustration, assume
that this person wants to receive a monthly pension (after retirement) of £2,000. Then the equal
amounts payable every month to buy this old age pension in 25 (until 65) years is
0. 20643 # "12 # 2000#
! 412. 86
12
That is the monthly equal payments necessary to provide for this retirement pension of 2,000
pounds.
g) This case is also very interesting. This is the Level Net Premium of a 18-year deferred
perpetuity-due with monthly payments for a person now aged 20 and it will be paid using just a
perpetuity-due (annual payments) for a person aged 29 (mind the notation)
D 38
"12#
"12#
18| ä 20
"ä 38 ! 11
D 18 24 #
P 18| ä 20 ! !
ä 20 ä 20
7575.028
"19. 386 ! 11 #
! 16859.584 24
22. 532
! . 37743
This is the amount to be paid every year (at the beginning) to provide for a 18-year deferred
perpetuity-due with monthly payment of 1/12. Of course, the level net premiums will be paid at the
beginning of each and every year until death. The benefit will be paid every month (in advance)
while the person is still alive, only if he or she is alive after age 38.
Question 4
In this case, 10 years, the formula for the level net (annual) premium is
! i
! 5000 A 20
10 P
"12#
5000 A 20 ! 5000 A 20 ! !
ä "12#
D 30
20:10! "ä 20 ! 11
24
#! D 20
"ä 30 ! 11
24
#
0.04
5000 ln"1.04# 0. 13339
! ! 82. 38
8. 2569
where
ä 20 ! 11 ! D 30 ä 30 ! 11
24 D 20 24
! 22. 532 ! 11 ! 10433. 310 21. 061 ! 11
24 15557. 436 24
! 8. 2569
Finally, the annual amount to be paid is 82.28 and the monthly level net premium during the 10
years is then
82. 28 ! 6. 8567
12
This means that just paying 6.8567 pounds every month during 10 years we can buy a whole
life insurance ( if we are 20) payable at death of 5,000 pounds. Compare this figure with the
amount required in the true life example and think about the difference.