Life Annuities

MATEMATIKA AKTUARIA

Pertemuan ke-8, 30 April 2014

Departemen Matematika FMIPA IPB

Life Annuities

Life Annuities

Introduction
A life annuity is a series of payments made continuously or
at equal intervals (such as months, quarters, years) while a
given life survives. It may be temporary, that is, limited to a
given term of years, or it may be payable for the whole of
life.
The payment intervals may commence immediately or,
alternatively, the annuity may be deferred. Payments may
be due at the beginnings of the payments intervals
(annuities-due) or at the ends of such intervals
(annuities-immediate).
Life Annuities

Life Annuities

Life annuities play a major role in live insurance operations.

Life insurances are usually purchased by a life annuity of
premiums rather than by a single premium. In pension
system, a retirement plan can be regarded as a system for
purchasing deferred life annuities (payable during
retirement) by some form of temporary annuity of
contributions during active service.
Life Annuities

Life Annuities

Continuous Life Annuities

We start with annuities payable continuously at the rate of 1 per
year. A whole life annuity provides for payments until death.
The present value of payments to be made is Y = āT | for
all T ≥ 0 where T is the future lifetime of (x).
The actuarial present value for a continuous whole life
annuity is denoted by āx .
Z ∞
āx = E[Y ] = āt| t px µ(x + t) dt
0
Z ∞ Z ∞
t
= v t px dt = t Ex dt.
0 0
Life Annuities

Life Annuities

Continuous Life Annuities

Recursive formula:
Z 1 Z ∞
āx = v t t px dt + v t t px dt
0
Z ∞1
= āx:1| + v px v s s px+1 ds
0
= āx:1| + v px āx+1 .
Life Annuities

Life Annuities

Continuous Life Annuities

From compound interest theory:
Rt −δt
āt| = 0 e−δu du = 1−eδ .
Then we have: 1 = δ āt| + v t
T
⇒ 1 = δ āT | + v T ⇔ āT | = 1−v
δ .
⇒ 1 = δ āx + Āx ⇔ Āx = 1 − δ āx .
Variance of āT | :

1 − vT Var (v T )
 
Var (āT | ) = Var =
δ δ2
2 Ā − (Āx )2
x
= .
δ2
Life Annuities

Life Annuities

Example 8.1
Under the assumption of a constant force of mortality, µ, and of
a constant force of interest, δ, evaluate
1 āx = E[āT | ]
2 Var (āT | )
3 The probability that āT | will exceed āx .
Life Annuities

Life Annuities

Solution 8.1
Z ∞ Z ∞
1
1 āx = t
v t px dt = e−δt e−µt dt = .
0 0 δ+µ
µ
2 Āx = 1 − δ āx = .
δ+µ
µ
By the rule of moments, 2 Āx = .
2δ + µ
"  2 #
1 µ µ
Var (āT | ) = −
δ2 2δ + µ δ+µ
µ
= .
(2δ + µ)(δ + µ)2
Life Annuities

Life Annuities

Solution 8.1
3

1 − vT
 
Pr (āT | > āx ) = Pr > āx
δ
  
1 µ
= Pr T > − log
δ δ+µ
 
1 µ
= t0 px where t0 = − log
δ δ+µ
Z t0
= exp(− µ dt)
0
 µ/δ
µ
= .
δ+µ
Life Annuities

Summary of Continuous Life Annuities

(Annuity of 1 per Annum Payable Continuously)

Whole Life Annuity

Present-Value Random Variable Y :

āT | , T ≥ 0

Actuarial Present Value E[Y ]:

Z ∞
āx = v t t px dt
0
Life Annuities

Summary of Continuous Life Annuities

(Annuity of 1 per Annum Payable Continuously)

n-Year Temporary Life Annuity

Present-Value Random Variable Y :
āT | , 0 ≤ T < n


ān| , T ≥ n

Actuarial Present Value E[Y ]:

Z n
āx:n| = v t t px dt
0
Life Annuities

Summary of Continuous Life Annuities

(Annuity of 1 per Annum Payable Continuously)

n-Year Deferred Whole Life Annuity

Present-Value Random Variable Y :

0 , 0≤T <n
āT | − ān| , T ≥ n

Actuarial Present Value E[Y ]:

Z ∞
n| āx = v t t px dt
n
Life Annuities

Summary of Continuous Life Annuities

(Annuity of 1 per Annum Payable Continuously)

n-Year Certain and Life Annuity

Present-Value Random Variable Y :
ān| , 0 ≤ T < n

āT | , T ≥ n

Actuarial Present Value E[Y ]:

Z ∞
āx:n| = ān| + v t t px dt
n
Life Annuities

Summary of Continuous Life Annuities

(Annuity of 1 per Annum Payable Continuously)

Additional Relations
1 = δ āx + Āx
1 = δ āx:n| + Āx:n|
n| āx = āx − āx:n|
Z n
āx:n| lx+t
s̄x:n| = = (1 + i)n−t dt
n Ex 0 lx+n
Life Annuities

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