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Commutation Functions in Life Insurance

The document provides an overview of various life insurance products and their associated commutation functions, including Whole Life, Term Life, Pure Endowment, and Endowment insurance. It outlines the essential formulas for calculating expected present values (EPVs) and includes practice problems for applying these concepts. Key variables such as Dₓ, Cₓ, Nₓ, and Mₓ are defined to facilitate understanding of cash flows and insurance benefits.

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Md Motiur Rahman
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19 views21 pages

Commutation Functions in Life Insurance

The document provides an overview of various life insurance products and their associated commutation functions, including Whole Life, Term Life, Pure Endowment, and Endowment insurance. It outlines the essential formulas for calculating expected present values (EPVs) and includes practice problems for applying these concepts. Key variables such as Dₓ, Cₓ, Nₓ, and Mₓ are defined to facilitate understanding of cash flows and insurance benefits.

Uploaded by

Md Motiur Rahman
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Commutation

Functions
Recap

1. Whole Life Insurance


(WL)
Notation:
Ax

2. Term Life
Insurance

3. Pure
Endowment

4.
Endowment
Recap

1. Deferred Whole X
Life

2. Deferred Term Life X


Insurance defe
r
Commutation Functions
•Each EPV requires multiple steps
•Probability chains, discounting, year-by-year
projection
•Need for a simplified and reusable approach
•Dₓ = vˣ * lₓ: Present value of $1 per life at age x
•Cₓ = vˣ⁺¹ * dₓ: PV of $1 paid at end of year of death
•Nₓ = Dₓ + Dₓ₊₁ + …: Sum of future discounted lives
•Mₓ = Cₓ + Cₓ₊₁ + …: Sum of future discounted
deaths
Life Annuity
Due
•Cash flow: $1 per year while alive (start of
year)
•EPV = 1 + v pₓ + v² pₓ pₓ₊₁ + …
•Simplified: äₓ = Nₓ / Dₓ
n-year Life Annuity
Due
• Payments of $1 at the start of each year, for up to n years while
the individual is alive.
• Formula:
n-year Life Annuity
Due
• Payments of $1 at the start of each year, for up to n years while
the individual is alive.
• Formula:
Whole Life
Insurance
•Cash flow: $1 at end of year of
death
•EPV = v qₓ + v² pₓ qₓ₊₁ + …
•Simplified: Aₓ = Mₓ / Dₓ
Term-Life
Insurance
•Benefit paid only if death occurs within n years
•EPV = sum of discounted probabilities over n
years
•Simplified: Aₓ:n| = (Mₓ - Mₓ₊ₙ) / Dₓ
Pure Endowment

•Benefit paid only if survives to


year n
•EPV = vⁿ * pₓ pₓ₊₁ … pₓ₊ₙ₋₁
•Simplified: Eₓ:n| = Dₓ₊ₙ / Dₓ
Endowment
•Benefit if death during n years OR survival to year n
•EPV = sum of death + survival PVs
•Simplified: Aₓ:n| = (Mₓ - Mₓ₊ₙ + Dₓ₊ₙ) / Dₓ
Practice A1 – Life Table Basics
• Given:
• - l₄₀ = 98000, l₄₁ = 97800
• - i = 5%
• Compute:
• - d₄₀, q₄₀, p₄₀
• - D₄₀, C₄₀
Practice A2 – Compute Nₓ and Mₓ
• Given:
• - D₄₁ = 91500, D₄₂ = 88200
• - C₄₁ = 2700, C₄₂ = 2580
• Compute:
• - N₄₀, M₄₀
Practice B1 – Whole Life Annuity-Due
• Given:
• - N₅₀ = 152000, D₅₀ = 9600
• Compute:
• - ä₅₀
Practice B2 – Whole Life Insurance
• Given:
• - M₅₅ = 8600, D₅₅ = 9400
• Compute:
• - A₅₅
Practice B3 – Term Life Insurance
• Given:
• - M₄₅ = 12300, M₅₅ = 7200, D₄₅ = 10000
• Compute:
• - A₄₅:₁₀|
Practice B4 – Pure Endowment
• Given:
• - D₃₀ = 15000, D₃₅ = 13700
• Compute:
• - E₃₀:₅|
Practice C1 – Endowment Insurance
• Given:
• - M₄₀ = 18500, M₆₀ = 9800
• - D₄₀ = 11000, D₆₀ = 7200
• Compute:
• - A₄₀:₂₀|
Practice C2 – Compare Term vs Endowment

• Using values from B3 and C1:


• - Which product costs more and why?
• - Interpret the difference in context.
Practice C3 – Intuition Check
• Two individuals, same D₅₀ but different M₅₀:
• - Who pays more for whole life insurance?
• - Explain why.
THANK
For watching this presentation
YOU

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