Life Insurance

Mortality Tables &

Insurance Premium
By M.Vedavalli

Life Insurance and Mortality Table

Creation of a
reliable
mortality
table

The
development
of life
insurance

Mathematics
to calculate
probabilities
of death.

Actuarial mathematics started with the French mathematician Blaise Pascal developing methods for
determining the probability of events occurring in games of chance.

What is a Mortality Table?

Table giving probabilities of survival and death at
successive ages

Statistical representation showing at each age the

probability of dying or living.
Exhibits average life of a person.

It cannot predict the death of a particular person.

Importance of Mortality Tables

A scientific instrument to determine the premium rate for different age groups of insureds.
Helps in developing attractive insurance plans for different age groups as the table presents the
probable death among a similar age group.
Helps to estimate the cost of insurance.
Facilitates the insurer to estimate the income from insurance business.
Helps to ascertain the number of death claims and the time of payment of such claims.
Helps the insurers to efficiently manage income, losses, risks and the probable claims.

Need for Mortality Tables

-Methods of Fixation of Premium
Value of Service Principle

Cannot be used as the value or utility to each person differs.

Value is higher to poor but they cannot be charged higher premium.

Higher premium will not attract business. Impracticable.

Cost of Service Principle

1. Cost of claim: Premium should be fixed such that the insurer is able to pay the full
amount of claim. This is net premium.
2. Cost of Administration: Fixed cost; Recurring cost. Fixed cost is spread over
policy life. Method of distribution of expenses is called loading. Net premium is
enhanced with loading a fixed charge to make gross premium or office premium.
Need for calculating cost of claim. There comes the need for mortality tables

Cost of Claim
Claims mainly due to death or maturity.

In annuity, payment is till death. Expectation of survival will be the basis of cost.

Forecasting of death is very important factor to decide the period and amount of claim. Thereafter premium can be easily calculated.

Forecasting on the basis of

1) experience of medical science 2) experience of past records.

Expectation of a number of deaths from a group of persons of the same age can be forecasted on the basis of

i) Theory of Probability and ii) Law of large numbers

How to construct a Mortality Table ?

Development of a mortality table

Difficult because the collection of data involved obtaining statistics on the
probability of death at each individual age.

Two ways to create a mortality table

(1) Closed Group Model (2) Open Group Model

Closed Group Model

Take a large group of people at age 0 and record deaths from that group from age 0
to 100 [the terminal age of the mortality table].
It is a time series type of statistical technique.
Disadvantage: It would take 100 years to fully develop the table and then it would
likely be obsolete due to changes in mortality due to medical improvements.
Closed group method is used in medicine to determine drug efficacy or the onslaught
of disease for a particular population.
Advantage: To be able to see how a particular risk might be impacting a separate
population during a short time frame.

Open Group Model

For life insurance, the open group model is used to create a mortality table.
Cross section time series data that can be updated over short periods of time.
Assumption: Probabilities of death remain fixed at each age allowing a table to be created using the probability of death for
each age .
The open group mortality method starts with doing a study of individuals living at each age and then recording the number of
deaths during the next year.
Separate sample is taken for each age and number of death during that age is recorded.
1qx = probability a person age x dies before reaching age x+1 defined to be :
1qx = lx - lx+1

, where lx - lx+1 = dx

lx
By taking the number of recorded deaths at each age [lx - lx+1 = dx , those who die between ages x and x+1] and then
dividing by the number of individuals who start out at age x [lx ] you have the probability of a person aged x dies before
attaining age x+1 or lqx . Once the qs have been calculated you can develop the mortality table along the following lines:
(1) select an initial number for those age 0,[ l0] this is sometimes called the radix to a mortality table, so for example
suppose you choose the radix to be 1,000,000

(2) next use the probability of death for the first year, 1q 0 to determine the number of people dying in the first year, [d0 ]
using the following relationship:
lq 0 =

d0

which provides d0 = 1q0 x

l0

l0

Mortality Table Contd..

suppose you have done a mortality study from ages 0 to 5 and have calculated qs at each of these ages and
found the following results:
Age(x)

lx

dx

lqx

.00708

.00176

.00152

.00146

.00140

.00135

Construction of Mortality Table

If you select an initial radix of 10,000,000 the first line of this mortality table would be as follows:
Age(x)
0

lx
10,000,000

dx
70800

1 qx
.00708

where d0 = 10,000,000 x .00708

The next line for age 1 in the mortality table would be found based on the following relationship:
l x+1 = l x - d x which may be translated as follows :

l x+1 the number of people living to age x+1 represent those who are living one year earlier at age x [lx ] less those who dont make it to age x+1 due to
death [ dx ].
So, l1
l1 =

= l0 -

d 0 and in this case that would be:

10,000,000 - 70,800 = 9,929,200 and the next line to the mortality table would be:

Age(x)

lx

dx

1qx
.00708

10,000,000

70800

9,929,200

17475

.00176

where d1 =

9,929,200 x .00176 = 17,475

In similar fashion, the next line for age 2 would be:

l 2 = 9,929,200 17,475 = 9,911,725
and d2 = 9,911,725 x .00152 = 15,066 to render the following morality table for the first three ages:

Age(x)

lx

dx

1 qx

10,000,000

70800

.00708

9,929,200

17475

.00176

9,911,725

15066

.00152

Sources of Mortality Information

Population Statistics Census Records, Municipal and other death records

Used only when no insurance experience in the field.
Accuracy doubtful; Not recent data; Biased with
abnormality of year.
Records of Life Insurers Collection of figures from as many insurers as
possible; 10 year data excluding abnormal years
Separate mortality tables for standard, substandard, male, female lives. Withdrawal and lapsation
are excluded
Miscellaneous Sources

Patients register in hospitals, statistics relating to health

and deaths

Process of Construction
Identification of
Objectives
Selection of
Statistical Method

Crude or Graduation.

Determination of
Mortality Rate

Sources of
Information

Analysis of Persons
included in the Risks

Determination
period of Records

Methods of
Construction

 DR. Sprags table based

on
insured male members of
20 companies.
Mortality rate according
to age group and policies
matured.
Rate of mortality not only
by age but by duration of
insurance.
Effective for a short
period only.
Can be used to determine
paid-up value

Ultimate

Mix or General Mortality

Table without
distinguishing select and
ultimate lives
Used where no selection
required
Non-medical policies
Group Insurance
No differentiation of new
or old insured.
Based on past claim
experience of a number of
insurance companies.
More accurate

Select

Aggregate

Types of Mortality Table

Rates in select period

omitted and only ultimate
rates are tabulated.
It gives maximum
possible rate of death
Ultimate tables are used
for valuation purpose.
Where reasonable safety
margins are sought or
where policies are
participating ones
ultimate tables are used.
Long period to construct.

Maikaham Graduation Mortality Table

Aggregate Table
Age No.of
x
Living at
x
lx

No.of
Death
between
x and x+1
dx=lx-lX+1

Death Rate
qx = dx/lx

Survival
Rate
Px= 1-qx

20

96061

548

0.00572

0.99428

21

95513

582

0.00608

22

94931

609

23

94322

24

93691

Force of
Mortality at
age X

No. of
survival at
mid age lx
and lx+1
Lx =
(lx+lx+1)/2

Total

0.00550

95787

4044238

42.101

0.99392

0.00592

95222

3948451

41.339

0.00643

0.99357

0.00629

94626

3853229

40.590

631

0.00668

0.99332

0.00659

94007

3758603

39.849

647

0.00691

0.99309

0.00682

96367

3664596

39.114

Ux

Survival

Tx

Complete
Expectation
of life at age x
Tx/Lx=

0e

Components of a Complete Mortality Table

Ux represents the force of mortality at age x which is defined as the limiting

value of the normal yearly rate of mortality at age x over a small interval t.
In practice t is considered as 1 day i.e 1/365 year.

t= (lx- lx+1/365)lx Ux= 365* t

Tx denotes total number of persons living at any time who are aged x or more.
Total number of survivors at any age = summation of number of persons
between mid age x and at the end of the table.

Tx = Lx + Lx+1+ Lx+2+ Lx+3.= (lx +lx+1)+1/2(lx+1 +lx+2)+1/2 (lx+2

+lx+3)+..

= lx + lx+1 + lx+2+ lx+3. = lx + N x+1

where N x+1 = lx+1 +lx+2 + lx+3+lx+4..

Components of Mortality Table

Complete Expectation of Life is the average number of complete years of life lived by each person aged x after
reaching age x .
Out of lx lives lx+1 reach age x+1. Each of lx+1 lives completes 1 year after age x. Similarly each of l x+2 completes 2
years after reaching age x and so on.
The total number of completed years that each person aged x will live is given by:
lx = lx+1+lx+2+ lx+3+
The average number of complete years that each person aged x will live is given by:
ex = (lx+1+lx+2+ lx+3+ ) lx = Nx+1 lx
This takes into account only complete years of lives and ignores fraction of l the year lived in the year of death. If
the fractions are taken into account we get the complete expectation of life denoted by l0x
The additional number of years of life to be included in respect of fractional years is given by
dx+1/2 dx+1 + 1/2 dx+2 +.= (dx+dx+1+dx+2+) = 1/2 lx
ex = (Nx+1 + lx) lx = Tx lx

Probabilities of Survival and Death

npx indicates the probability of a person aged x survives n years. When n is 1 it is denoted by px.
npx =( No of persons living at age x+n) ( No of persons living at age x)
= lx+n/ lx

mqx denotes the probability that a person aged x dies within the next m years.
mqx = ( lx-lx+m) lx = 1- mqx
m/qx denotes the probability that a person aged x will die between the age x+m and
x+m+1
m/qx = (lx+m lx+m+1) lx = dx+m lx
m/nqx denotes the probability that a person aged x dies within nyears following m
years from now i.e., between the age x+m and age x+m+n
Mqx = total number of deaths between the age x+m and age x+m+n is given by
1- m/nqx

Select Table
Mortality Rate per 1000
AGE

YEARS OF INSURANCE
1

6 YEARS
AND
OVER

AGE
ATTAINED

20

2.73

3.9

3.80

3.96

4.13

4.13

25

21

2.78

3.66

3.86

4.01

4.18

4.35

26

22

2.83

3.72

3.61

4.07

4.21

4.38

27

23

2.86

3.76

3.06

4.08

4.24

4.41

28

Dr.Sprags table covering insured male members of 20 companies.

Rate of mortality not only by age but by duration of insurance i.e., time since selection.
At the initial stage all the policyholders are selected after a thorough enquiry of health.
As the selection period passes the mortality rate increases although the persons are
of the same age at present.
The effect of selection is removed after 5 years and the mortality rate will be approximately equal

Ultimate Mortality Table

AGE
AT
ENTRY

6 Years
AGE
AND OVER ATTAINED

20

4.31

25

21

4.35

26

22

4.38

27

23

4.41

28

A mortality table in which the rates in the select period are omitted and only the ultimate
rates are tabulated. Used in participating policies. Maximum possible rate of death.

INTEREST FACTOR

Premium received in advance and claim paid later.

Interest earned by insurer on the premium collected to be given as benefit to the
policyholders.
Assuming a conservative rate of return that must be adequate to pay the amount of
claim calculate the present value
P= S/ (1+i)n
Where P= present value of the given sum
S is the given Sum
I is the assumed rate of return
N is the number of years before which P.V is to be calculated.

Premium

Premium to cover

Expected Claims
Reserve for outstanding claims
Provisions for the Clients
acquisition costs and management
expenses
Provision for tax liability
Reasonable provision for
Contingencies and profit margins

Factors for Calculation

Plan of the Policy
Present condition of the Person
Total Sum Assured
Current financial ability of the person after considering his expenses, income
and outstanding liabilities

Components of Premium
Mortality Cost of Covering Risk
Expenses - Various cost incurred by the company

Investments The amount invested in financial assets

Traditional Policies Hidden
ULIP Explicit

Components
Mortality
Charges

Expenses for
providing life
cover

Varies with age,

health,
occupation of
individual,
Coverage
amount, tenure
of the policy,
etc.

Rider Charges

Riders are
additional or
supplementary
benefits bought
with a main
insurance plan
Critical illness
benefit rider,
accident and
disability
benefit rider,
waiver of
premium rider
etc.,

Fund
Management
Charges:

Premium
Allocation
Charges
To cover initial
expenses
incurred. Higher
in the first few
years .
Varies greatly
from one
insurer to
another.
Includes
agents
commission,
underwriting,
medical charges
etc.,

After deduction,
balance amount
is utilised to
purchase
(investment)
units for the
policy.

Fee charged for

managing the
policyholders
investments
(in ULIPs)
To be capped at
1.5 % for
policy with
tenure < 10
years and
1.25 % for
tenure > 10 year

Policy Admin
Charges:

To meet
general
administration
expenses.
Deducted on
periodic basis to
cover services
and
maintenance of
the policy like
paper work.
work force etc.
May be fixed or
a percent of
premium or
percentage of
SA

Components Contd..

Top Up:
Unique feature offered in
ULIP - Customer can
make additional
contribution to increase the
cover. Certain percentage
of top up deducted as
charges. Lower than
regular charges.

Surrender Charges:
Charges levied at the time
of surrender of the policy
for premature or partial
withdrawal or full
encashment of units as
mentioned in the policy
conditions.

Switching charges:
For switching from one
investment fund to another.
Certain number of switches
are free others minimal
charge.

Misc Charges:
For any alterations within
the contract change in
terms, coverage amounts
etc.,

Premium Plan and Payment Mode

Single Premium, Level premium annually, half-yearly, quarterly, monthly,
limited payment and flexible premium payment.

Level Premium Plan amortize the single premium cost of insurance cover
over the entire duration of the policys coverage period or over any shorter
period.

Difficult to administer varying premium

Varying premium may lead to adverse selection.

Computation of Premium

Involves actuarial and statistical principles.

Risk Premium: Amount required to cover the risk of death for a given age for a period of
one year.
Net Premium/Pure Premium When interest yield is taken into account in the risk premium
Office Premium Net Premium + administrative expenses+ provision for unexpected
contingencies and fluctuations.
Tabular Premium Office premium modified for certain factors such as mortality rate
changes within age groups, the premium is sequentially graded and the final premium arrived
at in a tabular format. It is per thousand sum assured for a given age, term and type of policy.
Extra Premium: Charged in addition to normal premium to cover,
Additional benefits sought or
Extra risk involved.

Calculation of Age of Life assured

Age at entry is significant

Age to be rounded off to years which may be age nearer birthday or age next
birthday or age last birthday as per the practice of the insurance company and
their plan.

Calculation of Life Premium

In term assurance premium is received in advance and will not be returned if the life
insured survives. The death claims if any will be paid at the end of the year in which
the death occurs .
In case of 1 year, we know Dx= lx*qx
Total amount of claim payable = No.of Deaths * Amount of Policy
Premium= s * Dx/Lx
Interest at i % , Premiums: s (dx/lx) (l-i)-1
i.e PNSP= S.V. (dx/lx) where v=(l+i)-1
In case the term year is more than 1 year, consider a temporary assurance of person
aged x at entry for term of n years.
The present value of claims of death at a particular age =
No. of death * Amount of claims * Present value of Re.1
PV of Re.1 is called discounting factor.

Calculation of Net Single Premium

Let S be the amount of policy or sum assured and let I be the discounting rate.

The present value on claims on death occurring in 1st years= dx x S x V

Present value on claims on death occurring in 2nd year= dx+1 x S x V2
Present value of claims on death occurring in n years= dx+n-1 x S x V2

Total P.V. of claim= dx SV+ dx+1 x S x V2 + dx+2 x S x V3 +..+ dx+n-1 x S x Vn

=S [V dx+ V2 dx+1 + V3 dx+2 +.+ Vn dx+n-1 ]
Premium= Total P.V of claim/ Total no. of livings at age x
NSP= S {[V dx+ V2 dx+1 + V3 dx+2 +.+ Vn dx+n-1 ]/lx}
NSP= SA x.n`1
If the insurer does not earn interest, then:
NSP= S {[dx+ dx+1 + dx+2 +.+dx+n-1 ]/lx}

Calculation of Sum assured

HLV Approach: Focus is on the value of the expected future earnings stream of the family
breadwinner.
HLV projects ones income through his remaining working life expectancy and arrive at its
PV by means of a discounted rate.
The HLV method provides a rough estimate of insurance needs. Income replacement
approach allows some adjustment to the HLV method.
Need based Approach: Individual and family needs are analysed and prioritised with fair
estimation about the requirement. Practical Approach.
Multiple Approach: Some multiples of current income. Trying to duplicate the current income
into future.

Loading
Mode of payment as per table normally is yearly or quarterly
If payment frequency > the one adopted by the insurer additional charge is
loaded. If payment frequency < the one adopted by the company then rebate
is given.

Rebate for large sum assured- Fixed cost gets reduced

saving with the policyholder

and insurer shares the

Contribution Principle
Objective is to obtain equity during the distribution of surplus.
To return to each class of policy owners a share of the visible surplus
proportionate to the contribution of the class to the surplus.

Loading savings
Excess Interests
Mortality savings

Calculating Premium Instalments

1.Get the tabular Premium for the relevant age, table and term
2. Calculate rebate for mode of payment

3. Get balance (1-2)

4, Allow large sum assured rebate
5. Balance (3-4)
6. Multiply 5 with SA and divide by 1000
7. Add extra premium for Accident Benefit to 6
8. Add occupational extra premium to full S.A if applicable.
9. Add health extra premium if any on full S.A
Divide by frequency mode and round off

Life Fund

Level premium means charging same premium throughout the life of the policy.

Results in charging extra in early years and lower premium at the later period of the
contract.
Extra premium charged to be kept aside to supplement the shortage later
Endowment plan having saving component also requires money to be kept aside
Such earmarked fund after deducting expenses is called Life Fund

Valuation
Premium calculation based on three assumptions- Mortality, Interest &
Expenses

Periodic validation of actuals vis--vis expectations

Valuation exercise or Actuarial Valuation .

is carried out by

Yearly valuation exercise is a mandatory legal requirement as per Insurance

Act, 1938 and to be done by a professional actuary.

The actuary makes an estimate of future liabilities of the insurer in respect of

life insurance business on books and amount of premiums due to be received
in future.

Difference between the above two components is the fund that the insurer
must have in order to remain solvent.

Bonus
If the actuarial valuation is favourable surplus is generated. Major portion of this
surplus is distributed to policyholders as bonus.
Not more than 10% of surplus can be distributed among the shareholders.
With profits (Participating) and Without profits (Non- participating) policies
Additional premium for with Profits policies.
Simple Reversionary Bonus - Declared as rupees per thousand per annum and
remains attached to policies and paid with Sum Assured.

Compound Reversionary Bonus

Terminal Bonus or Final Additional Bonus
Cash Bonus

Interim Bonus

Actuary

An actuary is a social mathematician who uses mathematical skills to define , analyze and solve
complex business and social problems involving insurance and employee benefit programme.
Specialist in mathematics of insurance who calculates rates, reserves, dividends and other statistics
Study of mortality rate.
Evaluation of life insurance companies in regard to their financial position.

Determines the products offered and premium to be charged therefor.

Determines the investment pattern for the insurer.
Decides the bonus to be declared on different types of participating policies etc.,
Makes financial sense of future.

Enables more informed decisions.

Actuaries balance the interests of all.