Life insurance contracts/policies- agreements between life insuance company and one or more

policyholders.

Term assurance contract- insurance company will make a payment to the policy holders estate if the
policy holder dies during the term of the policy.
The benefits payable under simple life insurance policy are of two types:
1. Benefit payable on or following the death of the policyholder.
2. Benefit may be payable provided the life survives for a given time.

General Applicability of theory of CT5- to nearlife or nonlife contingencies like failure of

machines.

Note: This theory assumes that

payment is of known amount.
Types of life insurance contract:
1. Whole life insurance: Benefit under such a contract is an amount called
the sum assured which will be paid on the policy holders death.
2. Term Assurance
3. Pure endowment
4. Endowment Assurance
Endowment insurance is a combination of term assurance and pure
endowment contract.

Equation of value to determine premium: present value of inflows=

present of outflows
Inflows Premium
Outflows- benefits payable +expenses

In this subject we will usually assume that money can be invested or borrowed at
some given rate of interest. We will always assume that the rate of interest is
known, that is, deterministic. The mathematics of finance includes several useful
stochastic models of the behaviour of interest rates, but we will not use them. We

will not always assume that the rate of interest is constant, however. When the rate
of interest is constant, we denote the effective compound rate of
interest per annum by i and define
further comment.
-1

v = (1 + i ) , and we will use these without

Life insurance company may price products by any of the 3 aproaches:

1. Assume interest rate is constant for each future year
2. Use a deterministic approach where interest rate are assumed to change in a
predetermined manner
3. Use a stochastic approach, where future interest rates are random and follow a
certain statistical distribution.
Mean and variances of the present value of contingent benefits:
Two assumptions:
1. Mortality depends only on age
Or
2. Mortality depends on age + duration since some event.
The first assumption assumes ultimate mortality while the second assumption assumes
select mortality.

Concepts:
Expected present value of a payment contingent on an uncertain future event.
Simple life insurance are of two types:
1. Assurances
2. Annuities
4 varieties of life annuity contract: they are
1. Whole life level annuity or immediate annuity
2. Temporary annuity
3. Deffered annuity- start of the payment is deffered for a period of time
4. Guaranteed annuity
// An immediate annuity is one under which the first payment is made within the first year
itself. The other type of annuity is deferred annuity.//

// An annuity due is one which payments are made in advance.//

// A temporary annuity has payments that are made in advance and are limited to a specified
term//

The process of Constructing a Life Table

//Deterministic model of mortatlity
dx is the expected number of lives who die between age x and age x+1, out of l alpha lives
alive at age alpha.

The mortality of the recently joined policyholders is called select mortality and we
expect it to be better than that of longer duration policyholders, whose mortality we
shall call ultimate mortality.