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Chapter summary
Chapter summary
Life annuities
series of benefits paid contingent upon survival of a given life
single life considered
actuarial present values (APV)
actuarial symbols and notation
Forms of annuities
discrete - due or immediate
payable more frequently than once a year
continuous
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X
a
k+1 P (K = k)
a
x = E (Y ) = E a
K+1 =
k=0
X
k=0
a
k+1 k|qx =
a
k+1 kpx qx+k
k=0
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X
k=0
v k kpx =
k Ex =
k=0
Ax: 1k .
k=0
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= 1 + vpx a
x+1 .
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Example wk6.1
Example wk6.1
This problem is somewhat a variation of Examples 6.1 and 6.3 of
Cunnigham et al.
Suppose you are interested in valuing a whole life annuity-due issued to
(95). You are given:
i = 0.5%; and
the following extract from a life table:
x
95 96 97 98
`x 100 70 40 20
99
4
100
0
Express the present value random variable for a whole life annuity-due
to (95).
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n1
X
a
k+1 kpx qx+k + a
n npx .
k=0
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- continued
- continued
The current payment technique formula for an n-year temporary life
annuity-due is given by:
a
x: n =
n1
X
v k kpx .
k=0
Recursive formula:
x+1: yx1 .
a
x: yx = 1 + vpx a
The actuarial accumulated value at the end of the term of an n-year
temporary life annuity-due is
sx: n =
n1
X
a
x: n
1
=
,
n Ex
nk Ex+k
k=0
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Ax: n Ax: n
2
/d2 .
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n| K+1n
The APV of the annuity is
x
n|a
= E (Y ) = n Ex a
x+n = a
x a
x: n =
v k kpx .
k=n
2
2 2n
v npx a
x+n 2a
x+n + n|2a
x n|a
x .
d
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E (Y ) = a
n n qx +
a
K+1 kpx qx+k
k=n
= a
n +
v k kpx = a
n + a
x a
x: n
k=n
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a K kpx qx+k =
k=0
v k kpx .
k=1
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Example wk6.2
Example 6.2
Find formulas for the:
expectation; and
variance of the present value random variable for a temporary life
annuity-immediate.
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mK+J
X
j=0
1 v K+(J+1)/m
1 j/m
(m)
v
=a
=
K+(J+1)/m
m
d(m)
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- continued
- continued
The APV of this annuity is
E (Y ) = a
(m)
=
x
(m)
1 X h/m
1 Ax
v
h/mpx =
m
d(m)
h=0
Variance is
2 (m)
(m) 2
A x Ax
Var v K+(J+1)/m
Var (Y ) =
=
.
2
2
d(m)
d(m)
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Important relationships
Important relationships
Here we list some important relationships regarding the life
annuity-due with m-thly payments:
(m)
(m)
x + Ax
1 = d
ax + Ax = d(m) a
d
1 (m)
(m)
(m)
(m)
(m)
1 a
a
x = (m) a
x (m) Ax Ax = a
x a
Ax Ax
d
d
(m)
(m)
a
x
1 Ax
d(m)
(m)
(m)
(m)
=a
a
Ax
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UDD assumption
UDD assumption
If deaths are assumed to have uniform distribution in each year of
age, S is uniform on (0, 1) so that J is uniform also on the integers
{0, 1, ..., m 1}.
Then we have the following relationship:
(m)
s
1
(m)
a
(m)
=a
1 a
x 1 (m) Ax
x
d
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Alternative expressions
Alternative expressions
Other expressions for the life annuity-due payable m-thly:
(m)
(m) (m)
s1 a
1 a
x
s1
(m)
a
x
(m)
a
x
= (m) a
x (m) where
d(m)
(m) (m)
(m)
= s1 a
1
(m)
(m)
(m)
=a
1 a
x (m) Ax
(m)
=a
x
a
x
a
x
s1
i
d
i(m) d(m)
i i(m)
i(m) d(m)
d(m)
(m)
m1
[very widely used]
2m
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a
x =
E (Y ) = E a
T
Z
Z
t
=
v tpx dt =
0
=
0
a
T tpx x+t dt
t Ex dt
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- continued
- continued
One can also write expressions for the cdf and pdf of Y in terms of
the cdf and pdf of T .
Recursive relation: a
x = a
x: 1 + vpx a
x+1
h
2 i 2
Variance expression: Var a
T = 2Ax Ax
/ .
Relationship to whole life insurance: Ax = 1
ax .
Check out Example 5.2.1 where we have constant force of mortality
and constant force of interest.
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Z
a
t tpx x+t dt =
v t tpx dt.
Recursive formula: a
x: yx = a
x: 1 + vpx a
x+1: yx1 .
To derive variance, one way to get explicit form is to note that
Y = (1 Z) / where Z is the PV r.v. for an n-year endowment ins.
[details to be provided in class.]
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Z
= a
n n qx +
a
t tpx x+t dt
n
Z
= a
n +
v t tpx dt = a
n + a
x a
x: n .
n
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Miscellaneous Examples
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