Chapter 8 LIFE ANNUITIES Basic Concepts Commutation Functions Annuities Payable m thly Varying Life...
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Transcript of Chapter 8 LIFE ANNUITIES Basic Concepts Commutation Functions Annuities Payable m thly Varying Life...
Chapter 8
LIFE ANNUITIES
• Basic Concepts
• Commutation Functions
• Annuities Payable mthly
• Varying Life Annuities
• Annual Premiums and Premium Reserves
8.1 Basic Concepts
• We know how to compute present value of contingent payments
• Life tables are sources of probabilities of surviving
• We can use data from life tables to compute present values of payments which are contingent on either survival or death
Example (pure endowment), p. 155
• Yuanlin is 38 years old. If he reaches age 65, he will receive a single payment of 50,000. If i = .12, find an expression for the value of this payment to Yuanlin today. Use the following entries in the life table: l38 = 8327, l65 = 5411
Pure Endowment
• Pure endowment: 1 is paid t years from now to an individual currently aged x if the individual survives
• Probability of surviving is t px
• Therefore the present value of this payment is the net single premium for the pure endowment, which is:
t Ex = (t px ) (1 + t) – t = v t t px
Example (life annuity), p. 156
• Aretha is 27 years old. Beginning one year from today, she will receive 10,000 annually for as long as she is alive. Find an expression for the present value of this series of payments assuming i = .09
• Find numerical value of this expression ifpx = .95 for each x
Life annuity
Series of payments of 1 unitas long as individual is alive
x x + 1 x + 2 x + n
1 1 1
…..
present value(net single premium)
of annuity ax
age
probability px 2px npx
…..
xtt
txn
nxxxx pvpvpvpvvpa
1
33
22
Temporary life annuity
Series of n payments of 1 unit(contingent on survival)
x x + 1 x + 2 x + n
1 1 1
…..
present value
ax:n|
age
probability px 2px npx
xt
n
t
txn
nxxxnx
pvpvpvpvvpa
1
33
22
|:
last payment
n - years deferred life annuity
Series of payments of 1 unit as long as individual is alivein which the first payment is at x + n + 1
x x + 1 x + 2 x + n +1
1
…
present value
n|ax
age
probability n+1px
11
33
22
11|
nsxs
s
txtn
tn
xtntn
xnn
xnn
xnxn
pvpv
pvpvpvpva n
first payment
x + n + 2
1
n+2px
x + n …
Note: |:|
nxxxn aaa
Life annuities-due
x x + 1 x + 2 x + n
1 1 1
…..
äx
px 2px npx
…
x x + 1 x + 2 x + n
1 1
…..
äx:n|
px 2px
x x + 1 x + 2 x + n +1
1
…
n|äx
n+1px
x + n + 2
1
n+2px
x + n …
1
1
xtt
txx pvaa
1
11
xt
n
t
tnxnx
pvaa
1
1|1:|:
11
xnxn aa || 11
x + n-1
1
n-1px
npx
Note
|1:|:1
nxnxaa
but
|:|:)1(
nxnxaia
|:1|:1 nxxnxavpa
8.2 Commutation Functions
Recall: present value of a pure endowment of 1 to be paid n years hence to a life currently aged x
Denote Dx = vxlx
Then nEx = Dx+n / Dx
xx
nxnx
x
nxnxn
nxn lv
lv
l
lvpvE
Life annuity and commutation functions
11 t
xtxtt
tx Epva Since nEx = Dx+n / Dx
we have
3211
1xxx
t xx
txx DDD
DD
Da
Define commutation
function Nx as follows:
00 ttx
tx
ttxx lvDN
Then:x
xx D
Na 1
Identities for other types of life annuities
x
nxxn
t x
txnx D
NN
D
Da 11
1|:
x
nxxn D
Na 1|
x
nxxnx D
NNa
|:
temporary life annuity
n-years delayed l. a.
temporary l. a.-due
Accumulated values of life annuities
x
nxxnx D
NNa 11
|:
temporary life annuity
similarly for temporary life annuity-due:
x
nxxn D
DE
|:|: nxxnnxsEa
since and
|:|: nxxnnxsEa
we have
nx
nxxnx D
NNs
11
|:
and
nx
nxxnx D
NNs
|:
Examples (p. 162 – p. 164)
• (life annuities and commutation functions) Marvin, aged 38, purchases a life annuity of 1000 per year. From tables, we learn that N38 = 5600 and N39 = 5350. Find the net single premium Marvin should pay for this annuity
– if the first 1000 payment occurs in one year
– if the first 1000 payment occurs now
• Stay verbally the meaning of (N35 – N55) / D20
• (unknown rate of interest) Given Nx = 5000, Nx+1=4900,
Nx+2 = 4810 and qx = .005, find i
Select group
• Select group of population is a group with the probability of survival different from the probability given in the standard life tables
• Such groups can have higher than average probability of survival (e.g. due to excellent health) or, conversely, higher mortality rate (e.g. due to dangerous working conditions)
Notations• Suppose that a person aged x is
in the first year of being in the select group
• Then p[x] denotes the probability of survival for 1 year and q[x] = 1 – p[x] denotes the probability of dying during 1 year for such a person
• If the person stays within this group for subsequent years, the corresponding probabilities of survival for 1 more year are denoted by p[x]+1, p[x]+2, and so on
• Similar notations are used for life annuities:a[x] denotes the net single premium for a life annuity of 1 (with the first payment in one year) to a person aged x in his first year as a member of the select group
• A life table which involves a select group is called a select-and-ultimate table
Examples (p. 165 – p. 166)
• (select group) Margaret, aged 65, purchases a life annuity which will provide annual payments of 1000 commencing at age 66. For the next year only, Margaret’s probability of survival is higher than that predicted by the life tables and, in fact, is equal to p65 + .05, where p65 is taken from the standard life table. Based on that standard life table, we have the values D65 = 300, D66 = 260 and N67 = 1450. If i = .09, find the net single premium for this annuity
• (select-and-ultimate table) A select-and-ultimate table has a select period of two years. Select probabilities are related to ultimate probabilities by the relationships p[x] = (11/10) px and p[x]+1 = (21/20) px+1. An ultimate table shows D60 = 1900, D61 = 1500, and ä 60:20| = 11, when i = .08. Find the select temporary life annuity ä[60]:20|
• The following values are based on a unisex life table: N38 = 5600, N39 = 5350, N40 = 5105, N41 = 4865,N42 = 4625.It is assumed that this table needs to be set forward one year for males and set back two years for females. If Michael and Brenda are both age 40, find the net single premium that each should pay for a life annuity of 1000 per year, if the first payment occurs immediately.
8.3 Annuities Payable mthly
• Payments every mth part of the year
• Problem: commutation functions reflect annual probabilities of survival
• First, we obtain an approximate formula for present value
• Assume for a moment that the values Dy are also given for non-integer values of y
Usual life annuity
x x + 1 x + 2 x + n
1 1 1
…..
ax
age …..
Annuity payable every 1/m part of the year
x x + 1/m
x + 2/m
x + (m-1)/m
1/m 1/m
…..
a(m)x
age x + 1…..
1/m 1/m
Annuity payable every 1/m part of the year
x x + 1/m
x + 2/m
x + (m-1)/m
1/m 1/m
…..
a(m)x
age x + 1…..
1/m 1/m
x
mjix
x
mx
x
mx
xx
mjixmjix
xx
mxmx
xx
mxmx
x
mjixmji
x
mxm
x
mxm
xmjimji
xmm
xmmm
x
D
D
D
D
D
D
m
lv
lv
lv
lv
lv
lv
m
l
lv
l
lv
l
lv
m
pvpvpvm
a
//2/1
//
/2/2
/1/1
///2/2/1/1
//
/2/2
/1/1)(
1
1
1
1
Annuity payable every 1/m part of the year
x x + 1/m
x + 2/m
x + (m-1)/m
1/m 1/m
…..
a(m)x
age x + 1…..
1/m 1/m
0 1/
1/1
1/1
2/)1(1/21/11
1/)1(/2/1
//2/1)(
11
1
1
i
m
jmjix
x
m
jmjx
m
jmjx
x
xmmxmxmx
xmmxmxmx
x
x
mjix
x
mx
x
mxmx
DmD
DDmD
DDDD
DDDD
mD
D
D
D
D
D
D
ma
Using linear interpolation for Dx+i+j/m
xx
xxxxxxxxx
xxxxxxxxx
i
m
jmjix
ixixix
ixixix
m
jmj
ixixix
m
jixixm
jix
m
jmjix
ixixmj
ixmjix
Dm
mN
DDDDDDm
mDDDm
mDDmD
mDDmD
mDDmD
D
mDDmD
m
mmDDmDDDmD
DDDD
DDDD
2
12
)1(2
)1(
2
)1(
2
)1(
2
)1(
2
)1(
1
2312121
2321211
0 1/
1
11
1
11
1/
1/
Using linear interpolation for Dx+i+j/m
xxi
m
jmjix D
mmND
2
11
0 1/
m
ma
m
m
D
ND
mmN
mDa x
x
xxx
x
mx 2
1
2
1
2
11 11
)(
m
maa x
mx 2
1)(
Continuous life annuity
2
1
2
1limlim )(
xx
m
mx
mx a
m
maaa
dtpvpvpvpvm
aa
xtt
xmjimji
xmm
xmm
m
mx
mx
1
lim
lim
0
//
/2/2
/1/1
)(
dtpva xtt
x 0
2
1 xx aa
Annuity payable m-thly, deferred
x x + n+1/m
x + n+2/m
x +n+ (m-1)/m
1/m 1/m
…..
n|a(m)x
age x + n+1…..
1/m 1/m
… x + n
a(m)x+n
m
m
D
Dan
m
ma
D
D
aD
Dapvan
x
nxxnx
x
nx
mnx
x
nxmnxxn
nmx
2
1
2
1
)()()(
m
m
D
Danan
x
nxx
mx 2
1)(
Annuity payable m-thly, temporary
a(m)x:n|
m
m
D
Da
m
m
D
Dana
m
m
D
Dan
m
maanaa
x
nxnx
x
nxxx
x
nxxx
mx
mx
mnx
2
11
2
11
2
1
2
1
|:
)()()(|:
m
m
D
Daa
x
nxnx
mnx 2
11|:
)(|:
x x + 1/m
x + 2/m
x +n+ (m-1)/m
1/m 1/m
…..age x + n
1/m 1/m
Examples
• Page 168, 8.10
8.4 Varying Life Annuities
• Arithmetic increasing annuities
• It is sufficient to look at the sequence 1,2,3,….
• Temporary decreasing annuities
Example
• Ernest, aged 50, purchases a life annuity, which pays 5,000 for 5 years, 3,000 for 5 subsequent years, and 8,000 each year after. If the first payment occurs in exactly 1 year, find the price in terms of commutation functions.
Arithmetic increasing annuity
x x + 1 x + 2 x + n
1 2 n
…..
(Ia)x
age
probability px 2px npx
…..
0
1
0
21321
33
22
|
||
32
t x
tx
txt
xxxxtt
txt
t
txt
t
t
xnn
xxxx
D
Na
aaapvpvpv
pnvpvpvvpIa
0ttxx NS
x
xx D
SIa 1
Arithmetic increasing annuity, temporary
x x + 1 x + 2 x + n
1 2 n
…..
(Ia)x:n|
age
probability px 2px npx
x
nxnxxnx D
nNSSIa 111
|:
x + n+1
Arithmetic decreasing annuity, temporary
x x + 1 x + 2 x + n
n n-1 1
…..
(Da)x:n|
x + n+1
Arithmetic decreasing annuity, temporary
x x + 1 x + 2 x + n
n n-1 1
…..
(Da)x:n|
x + n+1
x x + 1 x + 2 x + n
1 2 n
…..
(Ia)x:n|
x + n+1
Arithmetic decreasing annuity, temporary
x x + 1 x + 2 x + n
n n-1 1
…..
(Da)x:n|
|:|:|: )1( nxnxnx anDaIa
x + n+1
x x + 1 x + 2 x + n
1 2 n
…..
(Ia)x:n|
x + n+1
x x + 1 x + 2 x + n
n+1 n+1
…..
(n+1)ax:n|
n+1
Arithmetic decreasing annuity, temporary
x x + 1 x + 2 x + n
n n-1 1
…..
(Da)x:n|
age
probability px 2px npx
|:|:|: )1( nxnxnx anDaIa
x + n+1
x
nxnxxnx D
nNSSIa 111
|:
x
nxxnx D
NNa 11
|:
x
nxxxnx D
SSnNDa
)( 221|:
Examples
• Georgina, aged 50, purchases a life annuity which will pay her 5000 in one year, 5500 in two years, continuing to increase by 500 per year thereafter. Find the price if S51 = 5000, N51 = 450, and D50 = 60
• Redo the previous example if the payments reach a maximum level of 8000, and then remain constant for life. Assume S58 = 2100
• Two annuities are of equal value to Jim, aged 25. The first is guaranteed and pays him 4000 per year for 10 years, with the first payment in 6 years. The second is a life annuity with the first payment of X in one year. Subsequent payments are annual, increasing by .0187 each year.If i = .09, and from the 7% -interest table, N26=930 and D25= 30, find X.
8.5 Annual Premiums and Premium Reserves
• Paying for deferred life annuity with a series of payments instead of a single payment
• Premium reserve is an analog of outstanding principal• Premiums often include additional expenses and
administrative costs• In such cases, the total payment is called
gross premium• Loading = gross premium – net premium• General approach: actuarial present values of two
sequences of payments must be the same (equation of value)
Annual premiums P = tP(n|äx)
x x + t-1 x + n +1
1
age
txx
nx
x
txx
x
nx
tx
xn
NN
N
DNN
D
N
a
aP
|:
x + n + 2
1
…x + 1 x + nx +t ……
1
• t is the number of premium payments
• Present value of premiums is P äx:t|
• Present value of benefits is n|äx
• Therefore P äx:t| = n|äx
txx
nxxnt NN
NaP
)(
P PP
Example
• Arabella, aged 25, purchases a deferred life annuity of 500 per month, with the first benefit coming in exactly 20 years. She intends to pay for this annuity with a series of annual payments at the beginning of each year for the next 20 years. Find her net annual premium if D25 = 9000, D 45 = 5000, ä25 = 15 and ä45 = 11.5
Reserves
x x + t -1 x + n +1
1
age
ntD
NNPNaPa
ntD
Na
aV
tx
nxtxnxtntxtxtn
tx
txtx
xnnt
,)(
|
,)(
|:
x + n + 2
1
…x + 1 x + nx +n-1 ……
1
• Analog of outstanding principal immediately after premium t has been paid
• Assume that the number of premium payments is n
• ReserventV (n|äx) = PV of all future benefits – PV of all future premiums
P PP P
ntV (n|äx)
Loading and Gross premiums
• Arabella, aged 25, purchases a deferred life annuity of 500 per month, with the first benefit coming in exactly 20 years. She intends to pay for this annuity with a series of annual payments at the beginning of each year for the next 20 years. Assume that 50% of her first premium is required for initial underwriting expenses, and 10% of all subsequent premiums are needed for administration costs. In addition, 100 must be paid for issue expenses. Find Arabella’s annual gross premium, if D25 = 9000, D 45 = 5000, ä25 = 15, and ä45 = 11.5
Chapter 9
LIFE INSURANCE
• Basic Concepts
• Commutation Functions and Basic Identities
• Insurance Payable at The Moment of Death
• Varying Insurance
• Annual Premiums and Premium Reserves
9.1 Basic Concepts
• Benefits are paid upon the death of the insured
• Types of insurance
– Whole life policy
– Term insurance
– Deferred insurance
– Endowment insurance
Whole life policy
• Benefit (the face value) is paid to the beneficiary at the end of the year of death of inured person
• If the face value is 1 and insurance is sold to a person aged x, the premium is denoted by Ax
x x + 1 x + 2 x + t+1…..
Ax
age
probability px 2px tqx
x + t
1
Whole life policy
x x + 1 x + 2 x + t+1…..
Ax
age
probability px 2px qx+t
x + t
1
0
1
t
ttxxtx vqpA
Term insurance
• Benefit (the face value) is paid to the beneficiary at the end of the year of death of inured person, only if the death occurs within n years
• If the face value is 1 and insurance is sold to a person aged x, the premium is denoted by A1
x
1
0
11|:
n
t
ttxxtnx vqpA
Deferred insurance
• Does not come into force until age x+n
• If the face value is 1 and insurance is sold to a person aged x, the premium is denoted by A1
x:n|
xnnxx AAA |1|: 1
|:| nxxxn AAA
n-year endowment insurance• Benefit (the face value) is paid to the beneficiary at the end
of the year of death of inured person, if the death occurs within n years
• If the insured is still alive at the age x+n, the face value is paid at that time
• If the face value is 1 and insurance is sold to a person aged x, the premium is denoted by Ax:n|
xnnxnx EAA 1|:|: |:
1|: nxxnx AAA
Exercise:
Examples
• Rose is 38 years old. She wishes to purchase a life insurance policy which will pay her estate 50,000 at the end of the year of her death. If i=.12, find an expression for the actuarial present value of this benefit and compute it, assuming px = .94 for all x.
• Michael is 50 years old and purchases a whole life policy with face value 100,000. If lx= 1000(1-x/105) and i=.08, find the price of this policy.
• Calculate the price of Rose’s and Michael’s policies if both policies are in force for a term of only 30 years.
• Calculate the price of Rose’s and Michael’s policies if both policies are to be 30 years endowment insurance.
9.2 Commutation Functions
• Recall:
0ttxx DN
xx
x lvD x
nxxn D
DE
Commutation Functions
• Recall:
• So we need:
1 xxx vdC
x
txttxxt D
Cvqp
1
0
1
t
ttxxtx vqpA
xx
txtxt
x
txt
tx
tx
x
txttxxt vl
vdv
l
dv
l
d
l
lvqp
1111
Whole life insurance
0ttxx CM
x
xx D
MA
000
1 1
ttx
xt x
tx
t
ttxxtx C
DD
CvqpA
Term insurance
1
0
11|:
n
t
ttxxtnx vqpA
x
nx
x
x
t nt x
tx
x
txn
t x
txnx D
M
D
M
D
C
D
C
D
CA
0
1
0
1|:
x
nxxnx D
MMA
1|:
n-year endowment insurance
xnnxnx EAA 1|:|:
x
nxnxx
x
nx
x
nxxnx D
DMM
D
D
D
MMA
|:
Note
• We can represent insurance premiums in terms of actuarial present values of annuities, e.g. Ax = 1 – d äx
• Hence they also can be found using “old” commutation functions
Examples
• Juan, aged 40, purchases an insurance policy paying50,000 if death occurs within the next 20 years, 100,000 if death occurs between ages 60 and 70, and 30,000 if death occurs after that. Find the net single premium for this policy in terms of commutation functions.
• Phyllis, aged 40, purchases a whole life policy of 50,000. If N40 = 5000, N41 = 4500, and i = .08, find the price.
9.3 Insurance Payableat the Moment of Death
• We consider scenario when the benefit is paid at the end of the year of death
• Alternatively, the benefit can be paid at the moment of death
Divide each year in m parts
mjix
mjixmjix
x
mjixmji
mx
mxmx
x
mxm
x
mxxm
mjxmxmjimji
mxmxmm
xmm
mx
l
ll
l
lv
l
ll
l
lv
l
llv
qpvqpvqv
A
/)1(
//)1(/)1(/
/1
/2/1/1/2/1/1
/)1(/1/)1(/
/1/1/1/2
/1/1
)(
0 1
'/),(
/
'/),(
/
'/)2,0(
/2'/)1,0(
/1
//)1(/
/2/1/2/1/1
//)1(/
/2/1/2/1/1
1
1
/1
/1/11
i
m
jmjisx
mji
x
mjisxmji
msxm
msxm
x
mjixmjixmji
mxmxmmxxm
x
x
mjixmjixmji
x
mxmxm
x
mxxm
lvml
lv
lvlv
ml
m
llv
m
llv
m
llv
ml
l
llv
l
llv
l
llv
Taking the limit as m→∞ we get:
dtpvdtl
l
l
lvdt
l
lv
lvml
AA
txxtt
tx
tx
x
txt
x
txt
i
m
jmjisx
mji
xm
mx
mx
0
'
0
'
0
0 1
'/),(
/)( 1limlim
• Whole life policy:
• Term policy:
Premium for insurance payable at the moment of death
dtpvA txxxt
0
t
dtpvnA txx
n
t |:0
t
Examples
• Find the net single premium for a 100,000 life insurance policy, payable at the moment of death, purchased by a person aged 30 if i = .06 and tp30 = (.98)t for all t
• Solve the previous example if it is 20 years endowment insurance, force of interest is .06 andlx = 105 – x, 0 ≤ x ≤ 105.
Remarks
• Using integration by parts, we can get
Āx = 1 – δ āx
• Approximate formula:
Āx ≈ (i/δ) Ax
• To obtain it, use linear interpolation in the following expression:
)()()(1
//)1(/
/2/1/2
/1/1
mjixmjixmji
mxmxm
mxxm
x
llvllvllvl
A