Class Assignment

ACSF 2716
STUDENT NUMBER: 2021356015
:2024003614
Question 1
- Level Annuities – a certain, fixed retirement income, pays a
fixed amount each year for the agreed period. Pays up an
agreed amount on each period for the agreed period of
until death.

Difference between single life and joint life annuity

From Investopedia

• Single life annuity pays a regular income to the annuity

recipient for as long as they live.
• When the retiree dies the annuity stops the monthly
payments which many consider a disadvantage.
Cashflows
Issuer vs Policyholder (Assume calculations use Assupol Life
as the Provider, Ultimate Retirement Income 4Life)
- The issuer will receive a Present Value of R1 000 000 which
is a positive cashflow, the present value is a lump sum
 that is paid at the start of the period. The R1 000 000
includes advertisement fees, admin fee as part of the risk
taken by the issuer to administer the Annuity to the
policyholder. The Present value is the sum of the present
value of the fixed amount that will be paid to the
policyholder. The issuer will pay monthly fixed amounts to
the policyholder at the end of every month of R10 836.03.
This amount is tax free fixed at the end of every month

- The policyholder will incur a large negative cashflow of R1

000 000 to purchase the annuity then will receive positive
cashflows of R10 836.03 at the end of every month for 10
years and if they die before the 10 years period is due their
beneficiaries will receive the residue.

Cashflow certainty

The cashflow in a single life cover is guaranteed until the 10

years period is completed. This amount is paid to the
policyholder for 120 months and if they die before the end of
that period their beneficiaries will receive the left payments.
This means that the monthly installments are the present
value of R10836.03 payable continuously for a period of 10
years. The payment stream starts at 𝑡𝑜 − 𝑡120, the R10836,03 is
payable at the end of each time period.
We can observe that we can calculate the interest rate used to
discount the cashflows to get the lump sum of R1m assuming
that there are no external factors that are affecting the interest
rate.

Comparisons to other Products

From Annuity and Investment Rates – Mast-head

- Every product differs in monthly payment which means

that it differs in the interest rate used to discount the
cashflows from the perspective of the issuer.
- The lump sum paid at the start of the annuity is the same
- All annuity payments are at zero % tax.
Factors affecting annuity cashflows
From Investopedia

Inflation - The purchasing power of level annuities from the

perspective of the policyholder decreases over time as
inflation will erode the purchasing power of the level income
over time.
Underlying Investments – From the perspective of the
insurance companies, they make investments to increase their
profits yielded from the annuity. The upside potential is when
the investment pays off and they make more money than R1m.
The downside potential is that they make a loss from the
investment, and they still have an obligation to make the fixed
annuity payments to the policyholders.
Market Interest Rates – Determine the present value of the
annuity – the higher the interest the lower the PV (a win for
policyholders) and vice versa when interest rates are low.

Word Count : 487

Question 2
From the insurer's perspective:
1. Annuity Plans: The annuity plans represent financial products
offered by insurance companies to investors. These plans
involve an initial investment, in this case, 1 million Rand, made
by the investor to the insurer. In return, the insurer promises to
make monthly payments to the investor for a specified period
or for the rest of their life, depending on the type of annuity plan
chosen.
2. Monthly Payments: The monthly payments made by the
insurer to the investor represent a portion of the initial
investment (1 million Rand) plus earnings or returns generated
by the insurer through investment activities. These payments
are designed to provide a regular income stream to the
investor, helping them to meet their financial needs, such as
living expenses, retirement income, or other financial goals.
3. Tax-Free Portion: The tax-free portion of R16,667.67
represents a portion of the monthly payment that is not subject
to income tax. This tax-free portion is a benefit provided to
investors to encourage them to invest in annuity plans and
provide them with tax-efficient income.
4. Taxable Portion: The taxable portion of represents the portion
of the monthly payment that is subject to income tax. This
portion is determined based on the tax laws and regulations
 applicable in the jurisdiction where the investor resides. The
investor is responsible for reporting and paying taxes on the
taxable portion of the annuity payments.
From the provider's (insurer's) perspective:
5. Investment Management: The insurer receives the initial
investment of 1 million Rand from the investor and is
responsible for managing this investment to generate returns.
The insurer invests the funds in various financial instruments
such as bonds, stocks, and other assets to generate income
and returns over time.
6. Monthly Payment Obligation: The insurer is obligated to make
monthly payments to the investor based on the terms of the
annuity plan. These payments include both the tax-free and
taxable portions and are calculated based on factors such as
the investor's age, life expectancy, prevailing interest rates,
and other actuarial considerations.
7. Risk Management: The insurer assumes various risks
associated with providing annuity plans, including investment
risk, longevity risk (the risk that investors may live longer than
expected), and interest rate risk. The insurer employs risk
management strategies to mitigate these risks and ensure that
it can fulfil its obligations to investors over the long term.
8. Profitability: The insurer aims to generate profits from the
annuity plans by earning a higher return on the invested funds
 than the amount paid out in monthly payments to investors.
Profitability is influenced by factors such as investment
performance, expenses, mortality experience, and regulatory
requirements.
Overall, annuity plans represent a contractual agreement between
investors and insurers, providing investors with a secure income
stream and insurers with an opportunity to generate returns from
managing investments and assuming risks.
Example
Just SA
To calculate the percentage of the monthly payment that is taxed,
we need to determine the taxable portion as a percentage of the
total monthly payment.
Given:
- Total monthly payment (including tax-free and taxable
portions): R19,736.85
- Taxable portion: R3,070.19
First, let's calculate the tax-free portion:
Tax-free portion=Total monthly payment−Taxable portion
Tax-free portion=R19,736.85−R3,070.19
Tax-free portion=R16,666.66
Now, let's calculate the percentage of the monthly payment that is
taxed:
Percentage taxed = (𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑃𝑜𝑟𝑡𝑖𝑜𝑛)
(𝑇𝑜𝑡𝑎𝑙 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑃𝑎𝑦𝑚𝑒𝑛𝑡)
⋅ 100

Therefore, approximately 15.55% of the monthly payment from

Just SA is taxed.

Word Count : 492