Universidad Carlos III de Madrid

Licenciatura en Ciencias Actuariales y Financieras

Survival Models and Basic Life Contingencies
PART II. Lecture 4:

Net Premium Calculations

This is a summary of formulae to calculate single net premium (expected
present value) and variance for assurances and annuities. Below we will
introduce the notion of yearly and monthly net premium. In the following, we
assume that we have a life table containing actuarial functions: lx , dx , Dx , Ax ,
and a
x at our disposition.
Remark 1 Remember that listed formulae correspond to contracts with
payments equal to 1. If the yearly payment realised is, in general,
C (single payment for assurances or periodic payment for annuities),
single net premium for such a contract has to be multiplied by C and
the variance of its present value has to be multiplied by C 2 .
Example 1 Single net premium of a whole life insurance paying 1 at the
end of the year of death issued for a 40 years old person is
A40
If the ammount paid at the end of the year of death were C
=100 the
single net premium would be
=100 A40
C
and the variance of its present value

=10.000 2 A40 (A40 )2 .

C
1

1
1.1

Assurances
Discrete Assurances

n-year Pure Endowment pays an amount at the end of the n th year

after the policy issue if the insured survives until that time.
Whole Life Insurance pays an amount at the end of the year of death of
the insured.
m-year Deferred Whole Life Insurance pays an amount at the moment
of death of the insured if death occurs at least m years after the policy issue.
n-year Term Insurance pays an amount at the moment of death of the
insured if the insured dies within the n year period commencing at the
issue.
n-year Endowment pays an amount either at the moment of death of the
insured or at the end of the nth year after the policy issue, whatever occurs
first.

1.2

Continuous Assurances

n-year Term Insurance pays an amount at the moment of death of the

insured if the insured dies within the n year period commencing at the
issue.
n-year Endowment pays an amount either at the moment of death of the
insured or at the end of the nth year after the policy issue, whatever occurs
first.
Whole Life Insurance pays an amount at the moment of death of the
insured.
m-year Deferred Insurance pays an amount at the moment of death of
the insured if death occurs at least m years after the policy issue.

2
2.1

Life Annuities
Discrete Life Annuities

Actuarial Perpetuity or a Whole Life Actuarial Annuity is a set of

yearly payments realised at the beginning (in case of annuity-due) or at the
end of year (in case of annuity-immediate). Payments are realsed only if the
insured is alive.
2

n-year temporary annuity-due is a stream of payments payable at the

beginning of the first n years after the issue. However, payments are realised
only if the life assured is still alive.
n-year temporary annuity-immediate is a stream of payments payable
at the end of the first n years after the issue. However, payments are realised
only if the life assured is still alive.
m-year deferred n-year temporary annuity-due is a set of n future payments; each amount is payable at the beginning of year m+1, m+2, . . . , m+n
(counting the year from the date of issue). No payment is made during the
first m years after the issue. Moreover, amounts are paid only if the person
insured is alive at the moment of payment.
m-year deferred n-year temporary annuity-immediate is a set of
n future payments; each amount is payable at the end of year m + 1, m +
2, . . . , m + n (counting the year from the date of issue). No payment is made
during the first m years after the issue. Moreover, amounts are paid only if
the person insured is alive at the moment of payment.

2.2

Life Annuities paid m-thly

Actuarial perpetuity with m-thly payments is a stream payments of

value m1 made at the beginning (if it is due) or at the end (if it is immediate)
of each of the m sub-periods within a year. The payments are conditioned
by the survival of the person insured.
n-year temporary actuarial annuity-due with m-thly payments is a
stream of n m payments of value m1 made at the beginning of each of the
m sub-periods within a year. The payments are conditioned by the survival
of the person insured.
n-year temporary actuarial annuity-immediate with m-thly payments is a stream of n m payments of value m1 made at the end of each
of the m sub-periods within a year. The payments are conditioned by the
survival of the person insured.

2.3

Continuous Life Annuities

Continuous life perpetuity and n-year temporary continuous life

annuities payable at a constant rate 1 are ordinary financial continuous
annuities, however, payments are conditional on the survival of the insured
person.
3

name of contract
discrete assurances
n-year pure endowement
whole life insurance
m-year deferred
whole life insurance
n-year term isurance
n-year endowment

symbol *

single net premium

variance of PV **

n Ex

Dx+n
Dx

Ax

from the life table

2
2
n Ex (n Ex )
2
Ax (Ax )2

m| Ax

m Ex

Ax

Ax:ne
1

2
m| Ax

Ax+m

m Ex

Ax:ne

Ax:ne
+
1

Ax

Ax+m

n Ex

continuous assurances
whole life insurance
m-year deferred
whole life insurance

m Ex

n-year term insurance

Ax:ne
1

n-year endowment

Ax:ne

discrete annuities
perpetuity-due
perpetuity-im.***
n-year temporary
life annuity-due
n-year temporary
life annuity-im.
m-year deferred n-year
temporary annuity-due
m-year deferred n-year
temporary annuity-im.
annuities paid m-thly%
perpetuity-due
perpetuity-im.
n-year temporary
life annuity-due
n-year temporary
life annuity-im.
continued on the next page

Ax+m

Ax:ne
1

Ax:ne
+
1

n Ex

a
x
ax

from the life table

a
x 1

a
x:ne

a
x n Ex a
x+n

ax:ne

a
x:n+1e 1

m| Ax

2
m Ex

d2

Ax:n+1e (Ax:n+1e )2

ax+m:ne

m| ax:ne

m Ex

ax+m:ne

m1
2m
m1
2m

ax
ax +

a
x:ne

(m)

a
x

(m)

ax

ax:ne

d2 [2 Ax (Ax )2 ]
d2 [2 Ax (Ax )2 ]
h

2 i
2 2
d
Ax:ne Ax:ne

m Ex

(m)

2
Ax
2
2
A

A
x
x
m|
m|
2

i2 +2i 2
i
Ax:ne
Ax:ne
1
1
2

2
2
Ax:ne Ax:ne

m| ax:ne

a
x
(m)
ax

2 Ax+m

2
2
Ax:ne Ax:ne

Ax

i2 +2i 2
Ax
2

Ax

m| Ax

(m)

n Ex a
x+n

(m)

(m)

n Ex ax+n

(m)

name of contract
symbol * single net premium
k-year deferred n-year
(m)
(m)
x:ne
x+k:ne
k Ex a
k| a
temporary annuity-due
k-year deferred n-year
(m)
(m)
k Ex ax+k:ne
k| ax:ne
temporary annuity-im.
continuous annuities#

perpetuity
ax
1 1 Ax
n-year temporary
ax:ne
1 1 Ax:ne
* symbol for single net premium (expected present value)
** PV stands for Present Value
*** im. stands for immediate
% formuae for this type of contract are approximate
# continuous annuities are paid at a constant rate 1

variance of PV **

Yearly and Monthly Net Premium

Until, now we have assumed that the premium is paid as a single payment
at the moment of the issue of the contract. However, in many cases, this
premium is considerable amount of money and insured prefers to distribute
its payment into equal yearly (monthly, quaterly, . . . ) payments.
The most basic way to determine the size (amount) of the periodic payments is to use so-called zero expected loss principlewhich means the
folowing: On one hand we have contract bought by the insured. Its payment (periodic in case of annuities or single in case of assurances) is C and is
fixed. The net present value of the contract is a random variable C Z. Our
goal is to determine the size of periodic payment P made by the insured.
Notice that the payment of the insured person is conditional on her survival,
therefore we can consider it as an actuarial life annuity. Its present value is
also random variable P W . We would like to set P in such a way that
E [C Z] = E [P W ]
that is
C E [Z] = P E [W ]
from this we have
P =C
5

E [Z]
E [W ]

Example 2 Imagine a 30 years old person that buys a pension plan that
guarantees C
=40.000 payment every year beginning from the age 65.
The insured person wants to pay the premium yearly until the age 65.
On one hand, we have 35-years deferred life perpetuity-due purchased
by the insured. Its expected present value is 35| a30 . On the other hand,
the payments from the insured to the insurance company are a 35year temporary life annuity-due. Its present value is a30:35e . Thus, the
amount paid by the insured each year will be
P =C
=40.000

30
35| a
a30:35e

Example 3 Let us calculate the monthly net premium P to be paid for

a pension plan. The person insured is 25 years old and will pay the
premium until the retirement age of 70 years at the beginning of each
month. The pension of C
=2.000 will be paid at the end of month.
The insured gets a 45-years deferred perpetuity-due paid monthly with
total annual paiment of 12 C
=2.000 = C
=24.000. On the other hand the
insured will pay a 45-years temporary annuity-immediate paid monthly
with total annual payment 12 P . Zero expected loss principle gives us
the equation (expected value of what you get is equal to the expected
value of what you pay)
(12)

(12)

=24.000 45| a
C
25 = 12 P a25:45e
wherefore the monthly net premium P is expressed as
(12)

P =

=24.000 45| a
C
25
(12)

12 a25:45e

(12)

=2.000 45| a25

C
(12)

a25:45e