ACTU 304- Notes on Life Insurance

Perpetual Saah Andam

University of Ghana

psandam@[Link]

3rd April, 2020

Pure Endowment

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Pure Endowment
Definition: Pure Endowment is a life insurance that pays an
amount of C if the insured survives to a certain age.

An insurance issued to a life aged x pays GH¢1 (C = 1) at age

of x + n on survival, where n is a fixed positive number. This
means that if Tx ≥ n, then an amount of GH¢1 is paid at t0 + n,
whose present value at t0 is v n . If Tx < n, no money is paid.
This can be written mathematically as;

n if t ≥ n
v ,

g(t) =

0, otherwise


 
1
where v = 1+i , then g(T(x)) is the present value of the
benefit t0 .

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Expected Value of a Pure Endowment

1
Its expected value, E(g(Tx )) is denoted by Ax: n . The symbol
"1" above n means that the benefit is paid if the n years end
sooner than the life of (x).
So we have,
1
Ax: n = E(g(Tx ))
= v n P(Tx ≥ n)
= v n n px
= n Ex

Also,
v x+n `x+n
n Ex =
v x `x

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Commutation function of a Pure Endowment

Let Dx = v x `x for x ≥ 0, so,

1 Dx+n
Ax: n = n Ex =
Dx
Dx is called a commutation function (It is a function by which
the net single premiums and actuarial present values for
various plans are determined).

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The Variance of a Pure Endowment
1

The variance of a pure endowment plan is denoted by V Ax: n .
1
1 1
2
V Ax: n = 2 Ax: n − Ax: n
2A 1 1

is the same as 2n Ex and it denotes Ax: n evaluated at
x: n
the discount factor v 2 . So,
2 1
Ax: n = v 2n P(Tx ≥ n)
= v 2n n px
`x+n
= v 2n
`x
v x+n `x+n
= vn
v x `x
Dx+n
= vn
Dx
n
= v n Ex

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So we have
1

V Ax: n = v n n Ex − (n Ex )2
= (v n − n Ex )n Ex
= (v n − v n n px )n Ex
= v n (1 − n px )n Ex

therefore the variance of a pure endowment plan

1

V Ax: n = v n (1 − n px )n Ex .

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Application of a Pure Endowment Plan
Example: An insurance on a life aged 25 pays a sum of
GH¢5000 on survival to age 60.

(i). Find the present value of the insurance based on a 6%

annual rate of interest.

(ii). Find the standard deviation of the insurance

Solution: n = 60 − 25 = 35, x = 25, (i). The present value of

the insurance can be done in two ways.
(a).
1
A25: 35 = v 35 35 p25
`60
= v 35
`25
81880.73
= 0.13011
95650.15
= 0.11138
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(b).

1 D60 2482.16
A25: 35 = = = 0.11138.
D25 22286.35

Hence, the present value is GH¢5000 x 0.11138 =GH¢556.90.

(ii). To find the standard deviation of the insurance, we use

1

V Ax: n = v n (1 − n px )n Ex
 
1
V A25: 35 = v 35 (1 − 35 p25 )35 E25
= 0.13011(1 − 0.85604)0.11138
= 0.0020862.
√
So, the standard deviation is GH¢5000 × 0.0020862
=GH¢228.37

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Life Insurance-(n year temporary
(or term) insurance)

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Life Insurance (n year temporary (or term) insurance)

Definition: Life insurance is an insurance whose benefit is

payable on death.

Life insurances that pay the death benefit at the end of the year
of death.

Let consider an insured is aged x at the time the insurance is

taken out. The insurance pays a benefit of GH¢1 at the end of
the year of death, if death occurs between the ages of x + m
and x + m + n, where m is a fixed nonnegative and n is a fixed
positive integer. This is called n year temporary (or term)
insurance, deferred for m years.

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Present Value of the n year temporary (or term)
Insurance

1
The present value of the insurance is denoted by m |Ax:n or
m |n Ax . The 1 above x means that the benefit is payable if the
life ends sooner than the insurance period.

The present value of the cash flow can be expressed as h(Kx ),

where 

 0, if k < m





h(k ) = v k +1 , if m ≤ k < m + n






0, if m + n ≤ k


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Expected Value of the n year temporary (or term)
Insurance

1
m |Ax:n = E(h(Kx ))
m+n−1
X
= v k +1 P(Kx = k )
k =m
m+n−1
X
= v k +1 k |qx
k =m
m+n−1
X dx+k
= v k +1
`x
k =m
m+n−1
X v x+k +1 dx+k
=
v x `x
k =m

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Commutation function of an n year temporary (or
term) insurance
Let us define the commutation functions Cx and Mx by
Cx = v x+1 dx and Mx = ∞
P
k =0 x+k , so we have,
C
m+n−1
1
X Cx+k Mx+m − Mx+m+n
m |Ax:n = = (1)
Dx Dx
k =m

If m = 0, then we have
1 Mx − Mx+n
Ax:n =
Dx
We need to prove that equation (1) is true.

Proof: We have Mx = ∞
P
k =0 Cx+k , so,

∞
X m−1
X m+n−1
X ∞
X
Cx+k = Cx+k + Cx+k + Cx+k
k =0 k =0 k =m k =m+n

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Also the L.H.S of the equation can be written as

m−1
X ∞
X m−1
X m+n−1
X ∞
X
Cx+k + Cx+k = Cx+k + Cx+k + Cx+k
k =0 k =m k =0 k =m k =m+n

∞
X m+n−1
X ∞
X
Cx+k = Cx+k + Cx+k (2)
k =m k =m k =m+n
P∞
We have, Mx+m = k =0 Cx+k +m , let k + m = α

=⇒ 0 + m = α, them m = α So we have,
∞
X ∞
X
Mx+m = Cx+α = Cx+k
α=m k =m

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Similarly,
∞
X
Mx+m+n = Cx+k +m+n
k =0

let b = k + m + n, if k = 0, then b = m + n, so we have,

∞
X ∞
X
Mx+m+n = Cx+b = Cx+k
b=m+n k =m+n

So, we can re-write equation (2) as;

m+n−1
X
Mx+m = Cx+k + Mx+m+n
k =m

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This implies that,
m+n−1
X
Mx+m − Mx+m+n = Cx+k
k =m

then, dividing through by Dx we have

m+n−1
1
X Cx+k Mx+m − Mx+m+n
m |Ax:n = = 
Dx Dx
k =m

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Variance of an n year temporary (or term) Insurance

The variance of the insurance is given as;

2
1
= 2m |Ax:n
1 1


V m |Ax:n − m |Ax:n

if m = 0, then we have;
1

2 1 1

2
V Ax:n = Ax:n − Ax:n

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