Sect 5 1

Chapter 5. Life annuities.
Manual for SOA Exam MLC.

Section 5.1. Whole life annuities.
c
2009.
Miguel A. Arcones. All rights reserved.
Extract from:
Arcones Manual for the SOA Exam MLC. Spring 2010
Edition.
available at http://www.actexmadriver.com/
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Whole life annuity
A whole life annuity is a series of payments made while an

individual is alive.
The payments can be made either at the beginning of the year,
either at the end of the year, or continuously.
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Whole life due annuity

Definition 1
A whole life due annuity is a series payments made at the
beginning of the year while an individual is alive.
Definition 2
The present value of a whole life due annuity for (x) with unit
payment is denoted by Yx .
Yx is a random variable that depends on Tx . Recall that Kx is the
interval of death of (x), i.e. Kx is the positive integer such that
the death of (x) takes place in the interval (Kx 1, Kx ].
Definition 3
The actuarial present value of a whole life due annuity for (x) with
unit payment is denoted by ax .
We have that ax = E [Yx ].
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Theorem 1
(i) Yx = aKx | =
(ii) If i 6= 0,
PKx 1
k=0
vk.
1 Zx
1 v Kx
=
,
Yx =
d
d
X
1 vk
1 Ax
ax =
k1 |qx =
d
d
k=1
and
2 A A2
Var(Zx )
x
x
=
,
d2
d2
where Zx is the present value of a unit life insurance paid at the
end of the year of death.
(iii) If i = 0, Yx = Kx = K (x) + 1, ax = ex + 1 and
Var(Yx ) = Var(K (x)).
Var(Yx ) =
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Proof: (i) Since death happens in the interval (Kx 1, Kx ],

payments of one are made at times 0, 1, 2, . . . , Kx 1, i.e. the
cashflow of payments
PKx 1 kis a Kx year annuity due. Hence,
Yx = aKx | = k=0
v .
(ii) If i > 0,
1 Zx
1 v Kx
=
.
Yx = aKx | =
d
d
Therefore,
X
X
1 vk
ax = E [aKx | ] =
ak| P{Kx = k} =
k1 |qx ,
d
k=1
k=1

1 Zx
1 Ax
,
ax = E
=
d
d

2 A A2
1 Zx
Var(Zx )
x
x
Var(Yx ) = Var
=
=
.
d
d2
d2
(iii) If i = 0, Yx = aKx | = Kx = K (x) + 1, ax = ex + 1 and
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5/114
Example 1
i = 5%. Kx has probability mass function:
k
P{Kx = k}
1
0.2
2
0.3
3
0.5
Find ax and Var(Yx ).
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Example 1
i = 5%. Kx has probability mass function:
k
P{Kx = k}
1
0.2
2
0.3
3
0.5

Solution: We have that a1| = 1, a2| = 1.952380952 and
a = 2.859410431. The probability mass of Yx is given by
3|
P{Yx = k}
1
0.2
1.952380952
0.3
2.859410431
0.5
Hence,
ax = (1)(0.2) + (1.952380952)(0.3) + (2.859410431)(0.5) = 2.2154195

E [Yx2 ] = (1)2 (0.2) + (1.952380952)2 (0.3) + (2.859410431)2 (0.5)
=5.431651421,
Var(Yx ) = 5.431651421 (2.215419501)2 = 0.5235678556.
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Example 2
Suppose that px+k = 0.97, for each integer k 0, and i = 6.5%.
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Example 2
Solution: Recall that if pk = p, for each k 1, then Ax =
Hence,
qx
qx +i .
qx
0.03
=
= 0.3157894737,
qx + i
0.03 + 0.065
1 Ax
1 0.3157894737
ax =
=
= 11.21052632,
d
0.065/1.065
qx
0.03
2
Ax =
=
= 0.1826762064,
qx + i(2 + i)
0.03 + (0.065)(2 + 0.065)
2 A A2
0.1826762064 (0.3157894737)2
x
x
Var(Yx ) =
=
= 22.26925679
d2
(0.065/1.065)2
Ax =
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Example 3
Assuming i = 6% and the life table in the manual, find a45 .
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Example 3
Assuming i = 6% and the life table in the manual, find a45 .
Solution: We have that
a45 =
1 A45
1 0.16657
=
= 14.72393.
d
0.06/(1.06)
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Example 4
John, age 65, has $750,000 in his retirement account. An
insurance company offers a whole life due annuity to John which
pays $P at the beginning of the year while (65) is alive for
$750,000. The annuity is priced assuming that i = 6% and the life
table in the manual. The insurance company charges John 30%
more of the APV of the annuity. Calculate P.
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Example 4
John, age 65, has $750,000 in his retirement account. An
insurance company offers a whole life due annuity to John which
pays $P at the beginning of the year while (65) is alive for
$750,000. The annuity is priced assuming that i = 6% and the life
table in the manual. The insurance company charges John 30%
more of the APV of the annuity. Calculate P.
a65 =
1 A65
1 0.37610
=
= 11.0222333333333.
d
0.06/(1.06)
The APV of this is this annuity is Pa65 = (11.0222333333333)P.

We have that 750000 = (1.3)(11.0222333333333)P and
750000
P = (1.3)(11.0222333333333)
= 52341.7586505226.
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Theorem 2
If i 6= 0,
2Yx (2 d) 2 Yx
Yx2 =
d
and
2ax (2 d) 2 ax
E [Yx2 ] =
.
d
Proof.
From Yx =
1Zx
d ,
we get that Zx = 1 d Yx . Hence,
1 2Zx + 2 Zx
1 2(1 d Yx ) + 1 d(2 d) 2 Yx
Yx2 =
=
2
d
d2
2Yx (2 d) 2 Yx
=
.
d
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Example 5
Suppose that i = 0.075, ax = 8.6 and 2 ax = 5.6.
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Example 5
(i) Calculate Var(Yx ) using the previous theorem.
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Example 5
Solution: (i) We have that
E [Yx2 ] =
2ax (2 d) 2 ax
2(8.6) (2 (0.075/1.075))(5.6)
=
d
0.075/1.075
=91.6,
Var(Yx ) = 91.6 (8.6)2 = 17.64.
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Example 5
(ii) Calculate Var(Yx ) using Ax and 2 Ax .
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Example 5
x
Solution: (ii) Using that ax = 1A
ax =
d , we get that Ax = 1 d
2
1 (0.075/1.075)(8.6) = 0.4. Since Ax uses a discount factor of
v 2,
2
Ax = 1(1v 2 ) 2 ax = 1(1(1.075)2 )(5.6) = 0.2458626284.
Hence,
Var(Yx ) =
2A
x
A2x
0.2458626284 (0.4)2
=
= 17.63999999.
d2
(0.075/1.075)2
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Theorem 3
(current payment method)
Yx =
ax =
1
Zx:k|
,
k=0
k=0
k=0
k Ex =
v k k px .
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Theorem 3
Yx =
ax =
1
Zx:k|
,
k=0
k=0
k=0
k Ex =
v k k px .
Proof: The payment at time k is made if and only if k < Tx .

Yx =
KX
x 1
vk =
k=0
ax = E [Yx ] =
v k I (k < Tx ) =
k=0
k Ex
k=0
1
Zx:k|
,
k=0
v k k px .
k=0
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Example 6
Consider the life table
x
`x
80
250
81
217
82
161
83
107
84
62
85
28
86
0
An 80year old buys a due life annuity which will pay $50000 at
the end of the year. Suppose that i = 6.5%. Calculate the single
benefit premium for this annuity.
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Example 6
Consider the life table
x
`x
80
250
81
217
82
161
83
107
84
62
85
28
86
0
An 80year old buys a due life annuity which will pay $50000 at
the end of the year. Suppose that i = 6.5%. Calculate the single
benefit premium for this annuity.
Solution:
X
217
161
`80+k
a80 =
vk
= 1 + (1.065)1
+ (1.065)2
`80
250
250
k=0
107
62
28
+ (1.065)4
+ (1.065)5
250
250
250
=1 + 0.81502347418 + 0.5677885781 + 0.35431941129
+ (1.065)3
+ 0.19277612654 + 0.08174665369 = 3.011654244,

(50000)a80 = (50000)(3.011654244) = 150582.7122.
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Remember that a decreasing due annuity has payments of

n, n 1, . . . , 1 at the beginning of the year, for n years. The
present value of a decreasing due annuity is
(Da)n|i =
n1
X
v k (n k) =
k=0
n an|i
.
d
Theorem 4
Suppose that the mortality of (x) follows De Moivres model with
integer terminal age , where x and are nonnegative integers.
Then,
(D
a)x|
(i) ax = x
.
xax|
d(x) .
x+1
ax = 2 .
(ii) If i 6= 0, ax =
(iii) If i = 0,
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Proof: (i)
ax =
k px
x1
X
k=0
vk
k=0
(Da)x|
x k
=
.
x
x
(ii) We have that

a
x|
x ax|
1 x
1 Ax
ax =
=
=
.
d
d
d( x)
(iii) ax = ex + 1 =
x+1
.
2
25/114
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Example 7
Suppose that i = 6% and De Moivres model with terminal age
100.
(i) Find a30 using A30 .
xax|
(ii) Find a30 using ax = d(x)
.
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Example 7
100.
xax|
.
A30 =
ax|i
x
a70|0.06
70
= 0.2340649124.
Hence,
a30 =
1 A30
1 0.2340649124
=
= 13.53151988.
0.06
d
1.06
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Example 7
100.
xax|
.
A30 =
ax|i
x
a70|0.06
70
= 0.2340649124.
Hence,
a30 =
1 A30
1 0.2340649124
=
= 13.53151988.
0.06
d
1.06
(ii)
a30 =
70 a70|0.06
0.06
1.06 70
70 16.38454387
= 13.53151988.
0.06
1.06 70
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Theorem 5
(Iterative formula for the APV of a life annuitydue)
ax = 1 + vpx ax+1 .
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Theorem 5
(Iterative formula for the APV of a life annuitydue)
ax = 1 + vpx ax+1 .
Proof: We have that
ax =
v k px = 1 +
k=0
=1 + vpx
v k px k1 px+1
k=1
v k1 k1 px+1
k=1
=1 + vpx
v k k px+1 = 1 + vpx ax+1 .
k=0
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Example 8
Suppose that ax = ax+1 = 10 and qx = 0.01. Find i.
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Example 8
Suppose that ax = ax+1 = 10 and qx = 0.01. Find i.
Solution: Using that ax = 1 + vpx ax+1 , we get that
101
10 = 1 + v (0.99)(10), v = (0.99)(10)
and i = (0.99)(10)
1 = 10%.
101
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Theorem 6
If the probability function of time interval of failure is
P{Kx = k} = pxk1 (1 px ), k = 1, 2, . . .
then
ax = E [Zx ] =
1+i
1
=
.
1 vpx
i + qx
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Theorem 6
P{Kx = k} = pxk1 (1 px ), k = 1, 2, . . .
then
ax = E [Zx ] =
1+i
1
=
.
1 vpx
i + qx
Proof 1. We have that P

pxk
j1
k
k px = P{K k + 1} =
j=k+1 px (1 px ) = (1 px ) 1px = px .
So,
ax =
X
k=0
v k k px =
v k pxk =
k=0
1
1+i
1+i
=
=
.
1 vpx
1 + i px
i + qx
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Theorem 6
P{Kx = k} = pxk1 (1 px ), k = 1, 2, . . .
then
ax = E [Zx ] =
1+i
1
=
.
1 vpx
i + qx
Proof 1. We have that P

pxk
j1
k
k px = P{K k + 1} =
j=k+1 px (1 px ) = (1 px ) 1px = px .
So,
ax =
X
k=0
v k k px =
v k pxk =
k=0
1
1+i
1+i
=
=
.
1 vpx
1 + i px
i + qx
Proof 2. Since Kx has a geometric distribution, Kx and Kx+1 have

the same distribution and ax = ax+1 . So, ax = 1 + vpx ax and
1
ax = 1vp
.
x
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2009.
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1
Recall that a = d1 = 1v
. For a whole life annuity, we need to
1
.
discount for interest and mortality and we get ax = 1vp
x
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Example 9
An insurance company issues 800 identical due annuities to
independent lives aged 65. Each of of this annuities provides an
annual payment of 30000. Suppose that px+k = 0.95 for each
integer k 0, and i = 7.5%.
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Example 9
(i) Find ax and Var(Yx ).
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Example 9
(i) Find ax and Var(Yx ).
1
1
1.075
=
=
= 8.6,
1
1 vpx
1 (1.075) (0.95)
1.075 0.95
qx
0.05
Ax =
=
= 0.4,
qx + i
0.075 + 0.05
qx
0.05
2
Ax =
=
= 0.2444988,
qx + i(2 + i)
0.05 + (0.075)(2 + 0.075)
2 A A2
0.2444988 (0.4)2
x
x
Var(Yx ) =
=
= 17.35981.
d2
(0.075/1.075)2
ax =
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Example 9
(ii) Using the central limit theorem, estimate the initial fund needed
at time zero in order that the probability that the present value of
the random loss for this block of policies exceeds this fund is 1%.
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Example 9
(ii) Using the central limit theorem, estimate the initial fund needed
at time zero in order that the probability that the present value of
the random loss for this block of policies exceeds this fund is 1%.
Solution: (ii) Let Yx,1 , . . . , Yx,800 be the present value per unit face
value for the 800 due annuities. Let Q be the fund needed.
800
X
E[
30000Yx,j ] = (30000)(800)(8.6) = 206400000,
j=1
800
X
Var(
30000Yx,j ) = (30000)2 (800)(17.35981) = 12499063200000,
j=1
Q = 206400000 + (2.326) 12499063200000 = 214623343.702743.

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Theorem 7
For the constant force of mortality model,
ax =
1
1+i
1
=
=
,
1 vpx
i + qx
1 e (+)
where qx = 1 e .
42/114
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Theorem 7
ax =
1
1+i
1
=
=
,
1 vpx
i + qx
1 e (+)
where qx = 1 e .
Proof: We have that
P{Kx = k} = e (k1) (1 e ), k = 1, 2, . . . Theorem 6 applies
1
1
with px = e . We have that ax = 1vp
= 1e (+)
.
x
43/114
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Whole life discrete immediate annuity

Definition 4
A whole life discrete immediate annuity is a series payments
made at the end of the year while an individual is alive.
Definition 5
The present value of a whole life immediate annuity for (x) with
unit payment is denoted by Yx .
Notice that Yx is a random variable. Yx depends on Tx . It is easy
to see that Yx = Yx 1.
Definition 6
The actuarial present value of a whole life immediate annuity for
(x) with unit payment is denoted by ax .
We have that ax = ax 1.
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Theorem
P
(i) Yx = aKx 1| and ax =
k=2 ak1| k1 |qx .
(ii) If i 6= 0,
Yx =
2 A A2
v Zx
v Ax
1 (1 + i)Zx
x
x
=
, ax =
and Var(Yx ) =
,
i
d
d
d2
where Zx is the present value of a life insurance paid at the end of

the year of death.
(iii) If i = 0, Yx = Kx 1 = K (x), ax = ex and
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Theorem 8
k=2 ak1|
k1 |qx .
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Theorem 8
P
k=2 ak1| k1 |qx .
Proof: (i) Since death happens in the interval (Kx 1, Kx ], payments of one are made at times 1, 2, . . . , Kx 1, payments of one are
made at times 1, 2, . . . , Kx 1, i.e. the cashflow of payments is an
annuity immediate. Hence, Yx = aKx 1| . If Kx = 1, Yx = a0| = 0.
Therefore,
ax = E [aKx 1| ] =
ak1| P{Kx = k} =
k=2
ak1| k1 |qx .
k=2
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Theorem 8
(ii) If i 6= 0,
Yx =
2 A A2
v Zx
v Ax
x
x
, ax =
and Var(Yx ) =
,
2
d
d
d

the year of death.
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Theorem 8
(ii) If i 6= 0,
Yx =
2 A A2
v Zx
v Ax
x
x
, ax =
and Var(Yx ) =
,
2
d
d
d

the year of death.
k1
(ii) If i 6= 0, ak1| = 1vi . Hence,
1 v Kx 1
1 (1 + i)Zx
v Zx
Yx = aKx 1| =
=
=
,
i
d

i
v Zx
v Ax
ax = E
=
,
d
d

2 A A2
v Zx
Var(Zx )
x
x
Var(Yx ) = Var
=
=
.
d
d2
d2
49/114
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Theorem 8
(iii) If i = 0, Yx = Kx 1 = K (x), ax = ex and Var(Yx ) =
Var(K (x)).
50/114
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Theorem 8
(iii) If i = 0, Yx = Kx 1 = K (x), ax = ex and Var(Yx ) =
Var(K (x)).
(iii) If i 6= 0, Yx = aKx 1| = Kx 1 = K (x).
51/114
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Example 10
52/114
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Example 10
qx
1 0.97
=
= 0.3157894737,
qx + i
1 0.97 + 0.065
v Ax
(1.065)1 0.3157894737
ax =
=
= 10.21052632,
d
0.065/1.065
qx
1 0.97
2
Ax =
=
= 0.1826762064,
qx + (2 + i)i
1 0.97 + (2 + 0.065)(0.065)
2 A A2
0.1826762064 (0.3157894737)2
x
x
Var(Yx ) =
=
d2
(0.065/1.065)2
=22.26925679.
Ax =
53/114
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Example 11
Suppose that i = 6% and the De Moivre model with terminal age
100. Find a30 .
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Example 11
Suppose that i = 6% and the De Moivre model with terminal age
100. Find a30 .
A30 =
a70|0.06
70
= 0.2340649124.
Hence,
a30 =
(1.06)1 0.2340649124
A30
=
= 12.53151988.
d
(0.06)(1.06)1
55/114
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Theorem 9
If i 6= 0,
Yx2 =
2Yx (2 + i) 2 Yx
i
and
E [Yx2 ] =
2ax (2 + i) 2 ax
.
i
56/114
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Theorem 9
If i 6= 0,
Yx2 =
2Yx (2 + i) 2 Yx
i
and
E [Yx2 ] =
Proof: We have that Yx =
2Y
x
Similarly,
Therefore,
1(1+i)2 Z
i(2+i)
2ax (2 + i) 2 ax
.
i
1(1+i)Zx
.
i
and (1 +
Hence, (1 + i)Zx = 1 iYx .
i)2 Z
= 1 i(2 + i) 2 Yx .
1 2(1 + i)Zx + (1 + i)2 2 Zx

i2
1 2(1 iYx ) + 1 i(2 + i) 2 Yx
=
i2
2
2Yx (2 + i) Yx
=
.
i
Yx2 =
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Example 12
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Example 12
2ax (2 + i) 2 ax
2(7.6) (2.075)(4.6)
=
= 75.4,
i
0.075
Var(Yx ) = 75.4 (7.6)2 = 17.64.
E [Yx2 ] =
59/114
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Example 12
Solution: (ii) Using that ax =
1(0.075)(7.6)
1.075
1(1+i)Ax
,
i
1iax
1+i
+ i)2 ,
we get that Ax =
= 0.4. Since 2 Ax uses a interest factor of (1
1 i(2 + i) 2 ax
1 (0.075)(2 + 0.075)(4.6)
=
(1 + i)2
(1.075)2
=0.2458626284.
2
Ax =
Hence,
Var(Yx ) =
2A
x
A2x
0.2458626284 (0.4)2
=
= 17.63999999.
d2
(0.075/1.075)2
60/114
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Theorem 10
(current payment method) Yx =
ax =
X
k=1
1
Ax:k|
=
X
k=1
1
k=1 Zx:k|
k Ex
and
k k px ,
k=1
1 = n I (n < K ) is the present value of an n-year pure

where Zx:k|
x
endowment life insurance
61/114
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Theorem 10
(current payment method) Yx =
ax =
1
Ax:k|
=
k=1
1
k=1 Zx:k|
k Ex
k=1
and
k k px ,
k=1
1 = n I (n < K ) is the present value of an n-year pure

where Zx:k|
x
endowment life insurance
Proof: The payment at time k is made if and only if k < Tx .

Hence,
X
X
k
1
Yx =
I (k < Tx ) =
Zx:k|
k=1
and
ax =
X
k=1
1
Ax:k|
k=1
X
k=1
k Ex
k k px .
k=1
62/114
c
2009.
Theorem 11
If the probability function of time interval of failure is is
P{K = k} = pxk1 (1 px ), k = 1, 2, . . .
then
ax = E [Zx ] =
vpx
1q
=
.
1 vpx
q+i
63/114
c
2009.
Theorem 11
If the probability function of time interval of failure is is
P{K = k} = pxk1 (1 px ), k = 1, 2, . . .
then
ax = E [Zx ] =
vpx
1q
=
.
1 vpx
q+i
Proof: We have that k px = P{K k + 1} = pxk . So,

a=
X
k=1
v k px =
v k pxk =
k=1
vpx
p
1 qx
=
=
.
1 vpx
1 + i px
qx + i
64/114
c
2009.
Example 13
Find ax .
65/114
c
2009.
Example 13
Find ax .
ax =
p
0.95
=
= 7.6.
1 + i px
1.075 0.95
66/114
c
2009.
Theorem 12
ax =
vpx
1 qx
e (+)
=
=
.
1 vpx
qx + i
1 e (+)
67/114
c
2009.
Theorem 12
ax =
vpx
1 qx
e (+)
=
=
.
1 vpx
qx + i
1 e (+)
Proof: Previous theorem applies with px = e . So,

ax =
vpx
1 qx
e (+)
.
=
=
1 vpx
qx + i
1 e (+)
68/114
c
2009.
Theorem 13
ax = px (1 + ax+1 ).
69/114
c
2009.
Theorem 13
ax = px (1 + ax+1 ).
Proof: We have that
ax =
k k px =
k=1
=px
1+
k px k1 px+1
k=1
k1
k1 px+1
k=2
=px (1 +
k k px+1 ) = px (1 + ax+1 ).
k=1
70/114
c
2009.
Example 14
Using i = 0.05 and a certain life table a30 = 4.52. Suppose that an
actuary revises this life table and changes p30 from 0.95 to 0.96.
Other values in the life table are unchanged. Find a30 using the
revised life table.
71/114
c
2009.
Example 14
Using i = 0.05 and a certain life table a30 = 4.52. Suppose that an
actuary revises this life table and changes p30 from 0.95 to 0.96.
Other values in the life table are unchanged. Find a30 using the
revised life table.
Solution: Using that
4.52 = a30 = vp30 (1 + a31 ) = (1.05)1 (0.95)(1 + a31 ), we get that
a31 = (4.52)(1.05)
1 = 3.995789474. The revised value of a30 is
0.95
1
(1.05) (0.96)(1 + 3.995789474) = 4.567578948.
72/114
c
2009.
Whole life continuous annuity
Definition 7
A whole life continuous annuity is a continuous flow of
payments with constant rate made while an individual is alive.
Definition 8
The present value random variable of a whole life continuous
annuity for (x) with unit rate is denoted by Y x .
Definition 9
The actuarial present value of a whole life continuous annuity for
(x) with unit rate is denoted by ax .
We have that ax = E [Y x ].
73/114
c
2009.
Theorem 14
(i) Y x = aTx | .
(ii) If 6= 0,
2
2A A
1 Zx
1 Ax
x
x
Yx =
, ax =
and Var(Y x ) =
.
(iii) If = 0, Y x = Tx and ax = e x .
74/114
c
2009.
Theorem 14
(i) Y x = aTx | .
(ii) If 6= 0,
2
2A A
1 Zx
1 Ax
x
x
Yx =
, ax =
and Var(Y x ) =
.
Proof: (i) Since payments are received at rate one until time Tx ,
Y x = aTx | .
75/114
c
2009.
Theorem 14
(i) Y x = aTx | .
(ii) If 6= 0,
2
2A A
1 Zx
1 Ax
x
x
Yx =
, ax =
and Var(Y x ) =
.
Proof: (ii) If 6= 0, an|i =
Y x = aTx |
1e n
,

1 Zx
1 v Tx
1 Zx
1 Ax
=
=
, ax = E
=
and

Var(Y x ) = Var
1 Zx

=
2A A
Var(Z x )
x
x
=
.
2
2
76/114
c
2009.
Theorem 14
(i) Y x = aTx | .
(ii) If 6= 0,
2
2A A
1 Zx
1 Ax
x
x
Yx =
, ax =
and Var(Y x ) =
.
Proof: (iii) If = 0, at|i = t. Hence, Y x = Tx and ax = e x .
77/114
c
2009.
Example 15
Suppose that v = 0.92, and the force of mortality is x+t = 0.02,
for t 0. Find ax and Var(Y x ).
78/114
c
2009.
Example 15
Suppose that v = 0.92, and the force of mortality is x+t = 0.02,
for t 0. Find ax and Var(Y x ).
Solution: Using previous theorem,
Ax =
0.02
= 0.1934580068,
ln(0.92) + 0.02
1 Ax
1 0.1934580068
=
= 9.672900337,
ln(0.92)
0.02
2
Ax =
= 0.1070874674,
(2)( ln(0.92)) + 0.02
ax =
2A A
Var(Z x )
0.1070874674 (0.1934580068)2
x
x
=
=
2
2
( ln(0.92))2
=10.01963899.
79/114
c
2009.
We define m Y x as the present value of whole life continuous

annuity with unit rate at a force of interest m times
the
original
Tx m
force, i.e. m Y x = 1em . We define m ax = E m Y x .

It is not true that m ax = E (Y x )m .
80/114
c
2009.
Theorem 15
If 6= 0,
2
E [Y x ] =
2(ax 2 ax )
.
81/114
c
2009.
Theorem 15
If 6= 0,
2(ax 2 ax )
.
E [Y x ] =
Proof: From
Hence,
ma
1m Ax
m ,
"
we get that
2 #
mA
x
= 1 m m ax .

1 2Zx + 2 Zx
=E
=E
2

1 2(1 ax ) + 1 2 2 ax
2(ax 2 ax )
=E
=
.
2
2
E [Y x ]
1 Zx
82/114
c
2009.
Example 16
Suppose that ax = 12, 2 ax = 7 and = 0.05.
2
x
(i) Find Var(Y x ) using that Var(Y x ) = AxA
.
2
(ii) Find Var(Y x ) using previous theorem.
83/114
c
2009.
Example 16
Suppose that ax = 12, 2 ax = 7 and = 0.05.
2
x
(i) Find Var(Y x ) using that Var(Y x ) = AxA
.
2
(ii) Find Var(Y x ) using previous theorem.
Ax = 1 ax = 1 (12)(0.05) = 0.4,
2
Ax = 1 2 ax 2 = 1 (7)(2)(0.05) = 0.3.
Hence,
Var(Y x ) =
2A
x
Ax
0.3 (0.4)2
=
= 56.
2
(0.05)2
(ii) We have that

2(ax 2 ax )
2(12 7)
=
= 200,
0.05
Var(Y x ) = 200 (12)2 = 56.
2
E [Y x ] =
84/114
c
2009.
Theorem 16
Z
Z
t
ax =
v t px dt =
0
t Ex
dt.
x
Proof: Let
0. Let
R x h(x) = v R, xx
t
H(x) = 0 h(t) dt = 0 v dt = ax| , x 0. By a previous theorem,
Z
E [Y x ] = E [aTx | ] = E [H(Tx )] =
Z
h(t)sTx (t) dt =
v t t px dt.
85/114
c
2009.
Example 17
Suppose that = 0.05 and t px = 0.01te 01.t , t 0. Calculate ax .
86/114
c
2009.
Example 17
Suppose that = 0.05 and t px = 0.01te 01.t , t 0. Calculate ax .
R
n+1
Solution: Using that 0 t n e t/ dt = n! ,
Z
Z
ax =
v t t px dt =
e (0.05)t 0.01te 0.1t dt
0
Z 0
0.01
0.15t
= 0.444444444.
=
0.01te
dt =
2
(0.15)
0
87/114
c
2009.
Theorem 17
The cumulative distribution function of Y x = aTx | is
FY x (y ) =
FTx
if y < 0,

)
ln(1y
Proof.
The function y = H(x) = ax| =
if 0 < y ax| ,
if ax| y .
1e x
is
x
1e
,
increasing. If
x
y = H(x) = 1e , then y =
e x = 1
)
x = ln(1y
. Hence, the inverse function of H is
ln(1y )
1
H (y ) = , y 0. Hence, if 0 < y ,
y and

FY x (y ) = P{Y x y } = P {H(Tx ) y } = P Tx H 1 (y )

ln(1 y )
ln(1 y )
=P Tx
= FTx
.
c
2009.
88/114
Theorem 18
The probability density function of Y x = aTx | is
fY x (z) =
ln(1y )
fTx
1y
if 0 < y < ax| ,

else.
Proof: For 0 < y < ax| ,
fY x (y ) =
d
d
FY x (y ) =
FT
dy
dy x
ln(1 y )

=

)
fTx ln(1y
1 y
89/114
c
2009.
Corollary 1
Under the De Moivre model with terminal age , Y x is a
continuous r.v. with cumulative distribution function
FY x (y ) =
ln(1 y )
,
( x)
if 0 < y ax| .
and density function

fY x (y ) =
1
,
(1 y )( x)
if 0 < y ax| .
Proof: The claims follows noticing that FTx (t) =

1
fTx (t) = x
, if 0 t x.
t
x
and
90/114
c
2009.
Corollary 2
Under constant force of mortality , Y x is a continuous r.v. with
cumulative distribution function
FY x (y ) = 1 (1 y ) ,
1
0<y .
and density function
1
fY x (y ) = (1 y ) 1 , 0 < y < .
91/114
c
2009.
Proof: Since FTx (t) = 1 e t , if 0 t < ; we have that for

0 < y 1 ,

ln(1 y )
ln(1 y )
FY x (y ) = FTx
= 1 exp
=1 (1 y ) .
Y x has density
fY x (y ) = FY0 (y ) = (1 y ) 1 ,
x
1
0<y < .
92/114
c
2009.
The present value of a continuously decreasing annuity is

Z n

n an|i
Da n|i =
.
(n t)v t dt =
93/114
c
2009.
Theorem 19
Under De Moivres model with terminal age ,

Da x|i
x ax|
=
.
ax =
( x)
x
94/114
c
2009.
Theorem 19
Under De Moivres model with terminal age ,

Da x|i
x ax|
=
.
ax =
( x)
x
Proof: We have that
a
x|
x ax|
1 x
1 Ax
ax =
=
=
( x)
and
Z
v t px dt =
ax =
0

Da x|i
x t
v
dt =
x
x
t
95/114
c
2009.
Example 18
Suppose that i = 6.5% and deaths are uniformly distributed with
terminal age 100.
(i) Calculate the density of Y 40 .
x
(ii) Calculate a40 using that ax = 1A
.
(iii) Calculate a40 using that ax =
xax|
(x) .
96/114
c
2009.
Example 18
terminal age 100.
x
.
xax|
(x) .

1
1
=
,
(1 y )( x)
(60)(1 y ln(1.065))
1 (1.065)60
if 0 < y <
= 15.51640952.
ln(1.065)
fY 40 (y ) =
97/114
c
2009.
Example 18
terminal age 100.
x
.
xax|
(x) .
Solution: (ii) We have that

A40 =
a60|0.065
60
1 (1.065)60
= 0.2586068254.
(60) ln(1.065)
Hence,
a40 =
1 A40
1 0.2586068254
=
= 11.77285493.
ln(1.065)
98/114
c
2009.
Example 18
terminal age 100.
x
.
xax|
(x) .
Solution: (iii) We have that

a60| =
1 (1.065)60
= 15.51640952.
ln(1.065)
Hence,
a40 =
100 40 a10040|
(ln(1.065))(60)
60 15.51640952
= 11.77285493.
(ln(1.065))(60)
99/114
c
2009.
Theorem 20
Under constant force of mortality , ax =
1
+ .
Proof.
We have that
1 +
1 Ax
1
ax =
=
=
.
100/114
c
2009.
Example 19
Suppose that = 0.07 and the force of mortality is 0.02.
(ii) Calculate a40 .
(iii) Calculate the variance of Y 40 .
101/114
c
2009.
Example 19
Solution: (i) The density of Y 40 is
5
1
fY 40 (t) = (0.02)(1 0.07y ) 7 , 0 < y <
.
0.07
102/114
c
2009.
Example 19
5
1
fY 40 (t) = (0.02)(1 0.07y ) 7 , 0 < y <
.
0.07
1
(ii) a40 = 0.07+0.02
= 11.1111111111111
103/114
c
2009.
Example 19
5
1
fY 40 (t) = (0.02)(1 0.07y ) 7 , 0 < y <
.
0.07
1
(ii) a40 = 0.07+0.02
= 11.1111111111111
(iii)
0.02
A40 =
= 0.222222222222222,
0.02 + 0.07
0.02
2
A40 =
= 0.125,
0.02 + (2)0.07
0.125 (0.222222222222222)2
Var(Y 40 ) =
= 15.4320987654321.
(0.07)2
104/114
c
2009.
Theorem 21
Suppose that Tx has a pth quantile p such that
P{Tx < p } = p = P{Tx p }.
Tx
Given b, > 0, the pth quantile of b 1e
is b 1e
105/114
c
2009.
Example 20
Suppose that i = 6% and De Moivre model with terminal age 100.
(i) Calculate the 30% percentile and the 70% percentiles of Y 30 .
106/114
c
2009.
Example 20
Solution: (i) Let 0.30 the 30% percentile of T30 . We have that
0.3 = FT30 (0.30 ) = 0.30
70 . So, 0.30 = 21. The 30% percentile of
T30
21
Y 30 = 1(1.06)
is 1(1.06)
= 12.11357171.
ln(1.06)
ln(1.06)
Let 0.70 the 70% percentile of T30 . We have that 0.7 =
So, 0.70 = 49. The 70% percentile of
FT30 (0.70 ) = 0.70
70 .
Y 30 =
1(1.06)T30
ln(1.06)
is
1(1.06)49
ln(1.06)
= 16.17422339.
107/114
c
2009.
Example 20
Solution: (ii) We have that
A30 =
a70|i
x
1 (1.06)70
= 0.2410186701
(70) ln(1.06)
and
a30 =
1 A30
1 0.2410186701
=
= 13.02549429.
ln(1.06)
108/114
c
2009.
Example 20
2
A30 =
a70|(1+i)2 1
x
1 (1.06)(2)(70)
= 0.1225492409
(70)(2) ln(1.06)
and
Var(Y 30 ) =
2A
30
(A30 )2
0.1225492409 (0.2410186701)2
=
2
(ln(1.06))2
=207.8908307.
109/114
c
2009.
Example 21
Suppose that v = 0.92 and that the force of mortality is
x+t = 0.02, for t 0.
(i) Calculate the density of Y x .
(ii) Calculate the first, second and third quartiles of Y x .
(iii) Calculate ax .
110/114
c
2009.
Example 21
x+t = 0.02, for t 0.
0.02
ln(0.92)
1
fY x (y ) = (1 y ) 1 = (0.02)(1 + ln(0.92)y )
1
if 0 < y
.
ln(0.92)
111/114
c
2009.
Example 21
x+t = 0.02, for t 0.
Solution: (ii) Let p the 100(p)% percentile of Y x . We have that
0.02
p = FYx (p ) = 1 (1 p ) = (1 + ln(0.92)p ) ln(0.92) .

ln(0.92)
So, p =
1(1p) 0.02
ln(0.92)
0.25
. The first quartile of Y x is

ln(0.92)
0.02
1 (1 0.25)
=
ln(0.92)
= 8.378536891.
112/114
c
2009.
Example 21
x+t = 0.02, for t 0.
Solution: (ii)
The median of Y x is
ln(0.92)
0.5
1 (1 0.5) 0.02
=
ln(0.92)
= 11.3263815.
The third quartile of Y x is

0.75
ln(0.92)
0.02
1 (1 0.75)
=
ln(0.92)
= 11.95599338.
113/114
c
2009.
Example 21
x+t = 0.02, for t 0.
ax =
1
1
=
= 9.672900338.
+
0.02 ln(0.92)
114/114
c
2009.

Sect 5 1

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Sect 5 1

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Chapter 5. Life annuities.

Manual for SOA Exam MLC.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Whole life annuity

A whole life annuity is a series of payments made while an

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Whole life due annuity

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Proof: (i) Since death happens in the interval (Kx 1, Kx ],

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Find ax and Var(Yx ).

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Find ax and Var(Yx ).

ax = (1)(0.2) + (1.952380952)(0.3) + (2.859410431)(0.5) = 2.2154195

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

The APV of this is this annuity is Pa65 = (11.0222333333333)P.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

we get that Zx = 1 d Yx . Hence,

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.

Chapter 5. Life annuities.

Section 5.1. Whole life annuities.

Manual for SOA Exam MLC.