Life Contingencies and life table

Long Term Actuarial Math

By
Mr. Ghulam Nabi
Lecturer CSAS, PU
Online Lecture-3
 5.2 Expected present value
Endowment Assurance Contarcts
• The expected present value of the
endowment assurance is:
• This can also be written as:

• The last expression holds because payment at time n is

certain if the life survives to age x + n - 1.
• Actuarial notation for the expected present value
• In actuarial notation we define:
• Question 1.9
• Rewrite the last expression assuming that the
amount of the death benefit is 3 units and the
amount of the survival benefit is 1 unit.
• Question 1.10
• Allan, aged 40, has just bought a 20-year
endowment assurance policy. The sum assured is
1 and is payable on survival to age 60 or at the
end of the year of earlier death. Determine the
expected present value of the benefit paid to
Allan, assuming AM92 Ultimate mortality and 4%
pa interest.
 5.3 Variance of the present value random
variable
• Note that F and G are not independent
random variables (one must be zero and the
other non-zero).
• So the life will either survive or die during the n-
year period. Therefore:
• [ var H] ≠ var [F] + var [G]
• We must find var [H] from first principles. As
before, we find that:
 6 Critical illness assurance contracts
• A critical illness assurance contract is a contract to
pay a sum assured on diagnosis of a particular
illness, provided that this occurs within a given
period of time.
• Consider such a contract, which is to pay a sum assured at the
end of the year of diagnosis, from a specified list of diseases, of a
healthy life aged x , provided this occurs during the next n years.
• To value this benefit, we proceed much as we did for a term
assurance. The EPV of an n -year term assurance is:
• For a critical illness assurance, we replace:

• the probability that a life aged x is still alive at

time k and has not yet been diagnosed with a
critical illness, and we replace:

• the probability that a life aged x + k is diagnosed

with a critical illness in the coming year.
 7 Deferred assurance benefits
• 7.1 Present value random variable
• A whole life assurance with sum assured 1,
payable to a life aged x but deferred n years is a
contract to pay a death benefit of 1 provided
death occurs after age x + n .
X+n

X n α
• If we let J denote the present value of this benefit,
then:
 7.2 Expected present value
• If  the benefit is payable at the end of the year of death
(if at all), the EPV of this assurance is denoted

• As usual, the subscript of n | to the left of the symbol

indicates that the event is deferred for n years.
• It is easily shown that

• Note the appearance of The factor

• is important and useful in developing EPVs. It plays the
role of the pure interest discount factor , where now
the payment or present value being discounted depends
on the survival of a life aged x .
 7.3 Variance of the present value random variable

• One useful feature of deferred assurances is

that it is easier to find their variances directly
than is the case for (deferred) annuities.

• For example, let X be the present value of a

whole life assurance and Y the present value of
a temporary assurance with term n years, both
for a sum assured of 1 payable at the end of the
year of death of a life aged x .