Term Life and Whole Life

copyright THC 2003. All rights reserved by Thomas Ho Company, New Yor
reference number
111 classification # 110601
Version
1.0
level
iintermediate
instructions
publication date
July, 2003
1. Change the market discount rate a
author
Ed Betz
2. The total present value costs of th
affiliation
TIAA-CREF
email address
ebetz@tiaa-cref.org
last revised date
Aug-03
references
Bowers, N, et al., Actuarial Mathematics, Society of Actuaries. Huebner, S.S and K. Black,
Descriptions
financial model class
issuer
model type
risk sources
risk distribution
economic assumptions
technical assumptions
key words
Links
data
financial models

present value model

Life Insurer
bond model
mortality
diversified risk
OAS model
m=1
annual interest rate
liability, life insurance, premiums, valuation

http://www.soa.org/tablemgr/tablemgr.asp

The Society of Actuaries website is a

Test Case
55 Year old Male
Interest Rate
4.5%
Benefit
Life Insurance (Pays $1.00 - or other unit - at the death of the insured life)
Mortality Basis: 1980 CSO Male Nonsmoker Mortality Rates
Duration Attained
from
Age
Valuation

Variable Name
Basis:

t
Given

x
55+t

1
2
3
4
5
6
7
8
9
10
11
12
13

55
56
57
58
59
60
61
62
63
64
65
66
67

Probability
of Death
between
age x and
age (x+1)

q(x)
Assumption
0.00822
0.00906
0.00995
0.01094
0.01205
0.01329
0.01467
0.01626
0.01806
0.02006
0.02225
0.02462
0.02716

Probability
of survival
to age x

Probability Interest
of survival Discount
to age x and
Death
between
age x and
age (x+1)

p(55,55-x) Death Claims

(1+int)^-(t-0.5)
1
0.99178
0.98279447
0.97301567
0.96237088
0.95077431
0.93813852
0.92437603
0.90934567
0.89292289
0.87501085
0.85554186
0.83447842

0.00822
0.00898553
0.00977881
0.01064479
0.01159657
0.01263579
0.01376249
0.01503035
0.01642278
0.01791203
0.01946899
0.02106344
0.02266443

0.97823198
0.93610715
0.89579632
0.85722136
0.82030752
0.78498327
0.75118017
0.71883269
0.68787818
0.65825663
0.62991065
0.60278531
0.57682805

note: hidden rows for

easier viewing

14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46

68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100

0.02992
0.03298
0.03673
0.0407
0.04495
0.05011
0.05578
0.06184
0.06824
0.07493
0.08195
0.08952
0.09788
0.10725
0.11782
0.12954
0.14218
0.15545
0.16918
0.18316
0.19733
0.21189
0.22705
0.24316
0.26082
0.28175
0.30983
0.35186
0.42099
0.541
0.74515
1
1

0.81181399
0.78752451
0.76155196
0.73358015
0.70372344
0.67209107
0.63841259
0.60280193
0.56552466
0.52693326
0.48745015
0.44750361
0.40744309
0.36756256
0.32814147
0.28947985
0.25198063
0.21615402
0.18255288
0.15166858
0.12388896
0.09944196
0.0783712
0.06057702
0.04584711
0.03388927
0.02434097
0.0167994
0.01088837
0.00630447
0.00289375
0.00073747
0

0.02428947
0.02597256
0.0279718
0.02985671
0.03163237
0.03367848
0.03561065
0.03727727
0.0385914
0.03948311
0.03994654
0.04006052
0.03988053
0.03942108
0.03866163
0.03749922
0.03582661
0.03360114
0.0308843
0.02777962
0.02444701
0.02107076
0.01779418
0.01472991
0.01195784
0.0095483
0.00754156
0.00591104
0.00458389
0.00341072
0.00215628
0.00073747
0

0.55198856
0.52821872
0.50547246
0.4837057
0.46287627
0.4429438
0.42386966
0.4056169
0.38815015
0.37143555
0.35544072
0.34013466
0.32548771
0.31147149
0.29805884
0.28522377
0.27294141
0.26118795
0.24994062
0.23917763
0.22887812
0.21902212
0.20959055
0.20056512
0.19192834
0.18366348
0.17575453
0.16818615
0.16094369
0.1540131
0.14738095
0.14103441
0.13496115

d by Thomas Ho Company, New York, NY. USA

www. thomasho.com

tom.ho@thomasho.com

1. Change the market discount rate and the mortality rate

2. The total present value costs of the death benefits are provided
input data
output data

Huebner, S.S and K. Black, Life Insurance, Prentice Hall, Inc.

The Society of Actuaries website is a necessary resouce for life insurance models.

Present
Value of
Death
claims in
year "t"

Death
Claims over
first "t"
years

NSP(55,t)

1+int)^-(t-0.5)
0.00804107
0.00841142
0.00875982
0.00912494
0.00951275
0.00991888
0.01033811
0.01080431
0.01129687
0.01179071
0.01226373
0.01269673
0.01307348

0.00804107 = net cost of "t" year term insurance

0.01645248
0.0252123
0.03433724
0.04385
0.05376888
0.06410699
0.0749113
0.08620817
0.09799889
10 Year Term insurance
0.11026261
0.12295935
0.13603283

0.01340751
0.01371919
0.01413898
0.01444186
0.01464187
0.01491768
0.01509428
0.01512029
0.01497926
0.01466543
0.01419863
0.01362597
0.01298062
0.01227854
0.01152344
0.01069567
0.00977856
0.00877621
0.00771924
0.00664426
0.00559539
0.00461496
0.00372949
0.00295431
0.00229505
0.00175367
0.00132546
0.00099415
0.00073775
0.0005253
0.00031779
0.00010401
0

0.14944034
0.16315953
0.17729851
0.19174037
0.20638224
0.22129992
0.23639419
0.25151449
0.26649374
0.28115918
0.2953578
0.30898377
0.3219644
0.33424294
0.34576638
0.35646205
0.36624061
0.37501683
0.38273607
0.38938033
0.39497572
0.39959068
0.40332017
0.40627448
0.40856952
0.4103232
0.41164866
0.41264282
0.41338057
0.41390586
0.41422366
0.41432766
0.41432766

Whole Life Insurance

The simplest insurance model calculates the cost of providing a level amount of insurance (in this case $1.00) for a specified p
calculation is to determine the average death claim year by year, and discount these from the midpoint of the year of claim to t
This uses very simple probability theory and standard actuarial notation. The probability of death within one year for a life age
for one year, from age x to x+1 is px = 1 - qx. The subscript x is a nonnegative integral value.

The collection of mortality rates for all ages is called a mortality table. The spreadsheet uses the Commissioners 1980 Standa
generally referred to as the 1980 CSO, for a male non-smoker, starting with age 55.

Like a bond, the value of the insurance contract is the present value of the future payments (or, since this is insurance, the futu
value is called the net single premium. The term net is employed because there is no provision for expense in this formula.

The 1980 CSO rates assume that when x=99, qx = 1, i.e. no one survives past age 100. If the sum of death claims is taken ov
the coverage is for the whole of life, and so is called whole life insurance. There will always be a death claim under this assum
is taken over a shorter period, say t years, then the coverage is called t-year term insurance. If the insured survives to age x+

Life Insurance Valuation Techniques

Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
Life Insurance Valuation Techniques
In progress:

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File Name
Actuarial Mathematics #1 - Single Premium Life Insurance.xls
Actuarial Mathematics #2 - Single Premium Immediate Annuity.xls
Actuarial Mathematics #3 - Annual Premium Life Insurance.xls
Reserves #1 - First Principles.xls
Reserves #2 - Simple Valuation Formulas.xls
Reserves #3 - Valuation Formulas That Recognize Acquisiton Expense.xls
Reserves #4a - Reserve Accumulation Formula (Term).xls
Reserves #4b - Reserve Accumulation Formula (WL).xls
Reserves #5a - Reserves in a Gain & Loss Exhibit (Term).xls
Reserves #5b - Reserves in a Gain & Loss Exhibit (WL).xls
Pricing #1a (Term).xls
Pricing #2a (Term).xls
Pricing #3a (Term).xls
Pricing #4a (Term).xls

Topic Illustrated
Net single Premiums for Life Insurance
Net Single Premiums for Immediate Annuities
Net Level Annual Premiums
Reserves as Cumulative Cash Flows
Reserve equal the Present Value of Future Be
Reserves using one year preliminary term met
Reserves developed from Income Statement E
Reserves developed from Income Statement E
Mean Reserves in as a surrogate for true Res
Mean Reserves in as a surrogate for true Res
Recognizing "best estimate" interest income v
Recognizing "best estimate mortality" versus v
Recognizing policyholder non-renewal rates
Recognizing operation expenses

Recognizing the need for capital in excess of R

Recognizing optional modes of premium paym
Recognizing optional modes of premium paym
Recognizing that deaths occur other than on D
Modeling secular trends: mortality improvemen
Modeling secular trends: expense inflation
Recognizing secular trends by calendar year o
Recognizing variations in risk by issue age and
Modeling a business line

Premiums for Life Insurance

e Premiums for Immediate Annuities
Annual Premiums
as Cumulative Cash Flows
equal the Present Value of Future Benefits Less Future Premiums
using one year preliminary term method
developed from Income Statement Elements
developed from Income Statement Elements
serves in as a surrogate for true Reserves
serves in as a surrogate for true Reserves
ng "best estimate" interest income versus valuation interest in the income statement
ng "best estimate mortality" versus valuation mortality in the income statement
ng policyholder non-renewal rates
ng operation expenses

ng the need for capital in excess of Reserves

ng optional modes of premium payment - monthly, quarterly semiannually
ng optional modes of premium payment - adjusting death claim amounts
ng that deaths occur other than on December 31 - effect on reserves and interest income
secular trends: mortality improvements
secular trends: expense inflation
ng secular trends by calendar year of issue: Cohort defined
ng variations in risk by issue age and other parameters
a business line