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6.1 Introduction
It is common for life insurance policies and annuities to depend on the death or survival of
more than one life. For example:
(i) A policy which pays a monthly benefit to a wife or other dependents after the death of
the husband (widows or dependents pension).
(ii) A policy which pays a lump-sum on the second death of a couple (often to meet
inheritance tax liability).
We will confine attention to policies involving two livesbut the same approaches can be
extended to any number of lives. We assume that policies are sold to a life age x and a life
age y , denoted (x) and (y).
Assurances paying out on first death, and annuities payable until first death.
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Assurances paying out on second death, and annuities payable until second death.
Assurances and annuities whose payment depends on the order of deaths.
The following multiple-state model represents the joint mortality of two lives, (x) and (y).
State 1 12
t State 2
(x) Alive - (x) Dead
(y) Alive (y) Alive
13
t 24
t
? ?
State 3 State 4
(x) Alive 34
t (x) Dead
-
(y) Dead (y) Dead
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Notes:
We just index the transition intensities by time t. Other notations are possible.
We implicitly assume that the simultaneous death of (x) and (y) is impossible: there
is no direct transition from state 1 to state 4.
Here we list the main EPVs met in practice, giving their symbols in the standard actuarial
notation. In the first place, we assume all insurance contracts (assurance- or annuity-type)
to be for all of lifeand to be of unit amount, i.e. $1 sum assured or $1 annuity per
annum.
Joint-life assurances
Axy is the EPV of $1 paid immediately on the first death of (x) or (y).
Axy is the EPV of $1 paid immediately on the second death of (x) and (y).
133
Contingent assurances
A1xy is the EPV of $1 paid immediately on the death of (x)provided (y) is then alive,
i.e. provided (x) is the first to die.
Axy1 is the EPV of $1 paid immediately on the death of (y)provided (x) is then alive,
i.e. provided (y) is the first to die.
A2xy is the EPV of $1 paid immediately on the death of (x)provided (y) is then dead,
i.e. provided (x) is the second to die.
Axy2 is the EPV of $1 paid immediately on the death of (y)provided (x) is then dead,
i.e. provided (y) is the second to die.
Joint-life annuities
axy is the EPV of an annuity of $1 per annum, payable continuously, until the first of
(x) or (y) dies.
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axy is the EPV of an annuity of $1 per annum, payable continuously, until the second
of (x) or (y) dies.
Reversionary annuities
ax|y is the EPV of an annuity of $1 per annum, payable continuously, to (y) as long as
(y) is alive and (x) is dead.
ay|x is the EPV of an annuity of $1 per annum, payable continuously, to (x) as long as
(x) is alive and (y) is dead.
The notation for reversionary annuities helpfully suggests (taking ax|y as an example) an
annuity payable to (y) deferred until (x) is dead. Think of m |an from Financial
Mathematics.
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Limited terms
The above contracts may all be written for a limited term of n years, in which case the
usual n is appended to the subscript.
Evaluation of EPVs
In the multiple-state, continuous-time model, we can compute all the above EPVs simply by
appropriate choices of assurance benefits bij or annuity benefits bi in Thieles
differential equations. The following table lists these choices for whole-life contracts.
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EPV b1 b2 b3 b12 b13 b24 b34
Axy 0 0 0 1 1 0 0
Axy 0 0 0 0 0 1 1
A1xy 0 0 0 1 0 0 0
Axy1 0 0 0 0 1 0 0
Axy2 0 0 0 0 0 1 0
A2xy 0 0 0 0 0 0 1
axy 1 0 0 0 0 0 0
ax|y 0 1 0 0 0 0 0
ay|x 0 0 1 0 0 0 0
axy 1 1 1 0 0 0 0
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d 1
V (t) = V 1 (t) (12
t + 13
t )(1 V 1
(t))
dt
d 2 d 3 d
V (t) = V (t) = V 4 (t) = 0
dt dt dt
Composite benefits
Many joint life contracts can be built up out of the above EPVs and the EPVs of single life
benefits. This is generally the simplest way to compute them, especially if using tables
rather than a spreadsheet.
Example: Consider a pension of $10,000 per annum, payable continuously as long as (x)
and (y) are alive, reducing by half on the death of (x) if (x) dies before (y). (This would
be a typical retirement pension with a spouses benefit.)Its EPV, denoted a say, is most
easily computed by noting that $10,000 p.a. is payable as long as (x) is alive, and in
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addition, $5,000 p.a. is payable if (y) is alive but (x) is dead, hence:
By similar reasoning, an annuity of $1 p.a. payable to (y) for life can be decomposed into
an annuity of $1 p.a. payable until the first death of (x) and (y), plus a reversionary
annuity of $1 p.a. payable to (y) after the prior death of (x); hence the useful:
ax|y = ay axy .
The one type of joint life benefit whose EPV is not easily written in terms of first-death,
second-death and single-life EPVs is the contingent assurance. We defer discussion until
139
Section 6.4.
It is also possible to specify a joint lives model via random future lifetimes. We have the
random variables:
Tmin is the random time until the first death occurs, and Tmax is the random time until the
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second death occurs.
Define:
141
and (useful result) the joint life survival function t pxy is the product of the single life
survival functions.
t qxy = 1 t pxy
= 1 t px t p y
= 1 {(1 t qx )(1 t qy )}
= t qx + t q y t qx t qy .
Solution:
n qxy = n qx + n qy n qx n qy
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= 0.2 + 0.4 0.2 0.4
= 0.52
n pxy = n px n py
= 0.8 0.6
= 0.48
To simplify the evaluation of probabilities, like t pxy , we can develop a life table function,
lxy , associated with Tmin .
If Tx and Ty are independent then:
143
We obtain the p.d.f. of Tmin , denoted fxy (t), by differentiation when Tx and Ty are
independent:
d
fxy (t) = t qxy
dt
d
= t pxy
dt
d
= t px t py
dt
d d
= t px t py + t p y t p x
dt dt
= [t px (t py y+t ) + t py (t px x+t )]
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Compare this to the single life case:
fx (t) = t px x+t .
Now, define xy (t) as the force of mortality associated with Tmin . We can show directly
that
fxy (t)
xy (t) = = x+t + y+t .
p
t xy
However, using the multiple-state formulation of the model, we see that Tmin is just the
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time when state 1 is left.The survival function associated with this event is, by definition,
11
t p (where the bullet represents policy inception) and we know that:
Z t
11
t p = exp 12 13
s + s ds .
0
By differentiating this, the force of mortality associated with leaving state 1 is the sum of
the intensities out of state 1 without assuming that Tx and Ty are independent.
Define:
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t pxy = P{Tmax > t)}
= P{Tx > t or Ty > t}
= P{Tx > t} + P{Ty > t}
P{Tx > t and Ty > t}
= t px + t py t pxy
which does not require Tx and Ty to be independent. If they are independent then:
t pxy = t px + t p y t px t p y
and also:
t qxy = P{Tmax t}
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= P {Tx t and Ty t}
= P{Tx t}P{Ty t} = t qx t qy .
The p.d.f. of Tmax and the force of mortality xy (t)associated with Tmax are left as
tutorial questions.
Define:
exy = E[Tmin ] and exy = E[Tmax ].
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These can be verified by considering the three exhaustive and exclusive cases:
149
Evaluation of EPVs
We can evaluate EPVs using the distributions of Tmin and Tmax , just as for a single life,
as an alternative to solving Thieles equations. For example, consider an assurance with a
sum assured of $1 payable immediately on the first death of (x) and (y).
Note that evaluating an integral numerically is not significantly easier than solving Thieles
equations numerically.
150
6.4 Curtate Future Joint Lifetimes
Basic definitions
exy = E [Kmin ]
exy = E [Kmax ] .
151
Kmin and Kmax are given by:
k qxy
= P {k Tmin < k + 1}
= P {Kmin = k}
k qxy
= P {k Tmax < k + 1}
= P {Kmax = k} .
Example: Given:
non-smoker 70 x + t
t qx =
80 x
valid for 0 x 70 and 0 t 10, and that the force of mortality for smokers is twice
that for non-smokers, calculate the expected time to first death of a (70) smoker and a (70)
non-smoker. You are given that the lives are independent.
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Solution: We want:
Z 10 Z 10
s ns s ns s ns
e70:70 = t p70:70 dt = t p70 t p70 dt.
0 0
Now let x be the force of mortality for non-smokers, then:
Z t
s
t px = exp 2 x+r dr
0
Z t 2
= exp x+r dr
0
ns 2
= t px
2
10 t
= .
10
Since:
ns 70 70 + t 10 t
t px =1 =
80 70 10
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therefore:
Z 10 3
s ns 10 t
e70:70 = dt = 2.5 years.
0 10
Any annuity or assurance we can define as a function of the single lifetime Kx , we can
define using Kmin , therefore depending on the first deathor Kmax , therefore
depending on the second death.
PV = aK .
min +1
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We denote the EPV of this benefit axy so:
axy = E[aKmin +1 ]
X
= ak+1 k qxy
k=0
X
= v k k pxy
k=0
Since the distribution of the present value is known, the variance, Var[aKmin +1 ], and
other moments can be calculated.
PV = aK .
max +1
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We denote the EPV of this benefit axy so:
axy = E[aKmax +1 ]
X
= ak+1 k qxy
k=0
X
= v k k pxy .
k=0
156
X
X
X
= v k k px + v k k py v k k pxy
k=0 k=0 k=0
= ax + ay axy .
Hence also:
axy + axy = ax + ay .
157
e.g. a(55) tables, but note that the values of axy are given not axy , and they are only
given for even ages may need to use linear interpolation.
For example:
1
a66:61 (a66:60 + a66:62 ).
2
(ii) Given commutation functions. e.g. A196770 tables, but note that they are only given
for x = y and at 4% interest.
Note that (assuming independence):
X
X
axy = v t t pxy = v t t p x t py
t=0 t=0
t lx+t ly+t
X
= v
t=0
lx ly
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( 1
)
X v 2 (x+y)+t lx+t ly+t
= 1
t=0 v 2 (x+y) lx ly
Nxy
=
Dxy
where:
1
Dxy = v 2 (x+y)
lx ly
X
Nx+t:y+t = Dx+t+r: y+t+r .
r=0
159
Warning:
axy:n = axy n axy
= axy v n n px n py ax+n:y+n
1 Dx+n Dy+n
= axy n ax+n:y+n .
v Dx Dy
(i) a80:75
(ii) 10 | a70:65 .
Solution:
We can extend many of the formulations for single life annuities to joint life annuities. This
applies to:
A certain life office issues a last survivor annuity of $2,000 per annum, payable annually in
arrear, to a man aged 68 and a woman aged 65.
(a) Using the a(55) ultimate table (male/female as appropriate) and a rate of interest of
4% per annum, estimate the expected present value of this benefit.
(b) Using the basis of (a) above, derive an expression (which you need NOT evaluate)
162
for the standard deviation of the present value of this benefit, in terms of single life
and joint life annuity functions.
Solution:
163
(b) Present Value = 2000 aK
max
h i
So we want: Var 2000 aK
max
h i
= 20002 Var aK 1
max +1
h i
= 20002 Var aK
max +1
Kmax +1
2 1v
= 2000 Var
d
2
2000 K
max +1
= Var v
d
2 2
2000 m f
= A68:65 Am f
68:65
d
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where * means evaluated at:
j = i2 + 2i = 8.16%.
We now use:
Axy = 1 d axy
and:
axy = ax + ay axy
and:
p
SD[P V ] = V ar[P V ]
to get: (
2000
m f m f
1 d a68 + a65 a68:65
d
h i2 12
f m f
1 d am
68 + a65 a68:65 .
165
Joint life assurances
Consider an assurance with sum assured $1, payable at the end of the year of death of the
first of (x) and (y ) to die. The benefit is payable at time Kmin + 1 so has present value:
v Kmin +1 .
Ax = 1 dax .
166
It can be shown by similar reasoning that:
Axy = 1 daxy
Axy = 1 axy
Axy:n = 1 daxy:n
Axy:n = 1 axy:n
and so on.
167
and similar relationships can be derived, e.g:
Axy = 1 daxy
Axy:n = 1 daxy:n .
Reversionary Annuities
ax|y = ay axy
just by noticing that the following define identical cashflows no matter when (x) and (y )
should die:
(1) a reversionary annuity of $1 per annum payable continuously while (y) is alive,
following the death of (x).
(2) an annuity of $1 per annum payable continuously to (y) for life, less an annuity of $1
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per annum payable continuously until the first death of (x) and (y).
Hence the cashflows have identical present values, and the same EPVs. We can apply
similar reasoning to other variants of reversionary annuities, for example:
ax|y = ay axy
X
= v k k py (1 k px )
k=0
ax|y = ay axy
X
= v k k py (1 k px )
k=1
(m)
ax|y = ay(m) axy
(m)
1 X k
= v m k py (1 k px )
m m m
k=0
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(m)
ax|y = a(m)
y a(m)
xy
1 X k
= v m k py (1 k px ).
m m m
k=1
For example:
ax|y = ay axy
= (1 + ay ) (1 + axy )
= ay axy .
Hence:
ax|y = ax|y .
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(a) ax|y ax|y
(m)
(b) ax|y ax|y .
Example: Calculate the annual premium (payable while both lives are alive) for the
following contract for a man aged 70 and woman aged 64.
Benefits:
Basis:
= 0.9 P am f
70:64
= 0.9 P (1 + 5.576)
= 5.9184 P.
EPV of assurance
= 10, 000Am f
70:64
m f
= 10, 000 1 a70:64
10, 000 1 0.076961(am f
70:64 + 0.5)
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EPV of reversionary annuity
= 5, 000 am f
70|64 + af64|70
m
= 5, 000 am f
70|64 + af m
64|70
f m f f m
= 5, 000 a64 a70:64 + am
70 a64:70
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Contingent assurances
Consider a contingent assurance with sum assured $1 payable immediately on the death
of (x), if (y ) is still then alive.
The probability that life (x) dies within t years with life (y ) being alive when life (x) dies is
1
denoted t qxy and:
1
t qxy = P[(x) dies within t years and before (y)]
= P[Tx < t and Tx < Ty ].
This is an example of a contingent probability,so called because they are associated with
the death of a life contingent on the survival or death of another life.
Now let fx (r) be the density of Tx and fy (r) be the density of Ty , then:
Z t Z
1
t qxy = fx (r)fy (s)ds dr
r=0 s=r
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Z t Z
= fx (r) fy (s)ds dr.
r=0 s=r
Since: Z
fy (s)ds = r py
s=r
then: Z t
1
t qxy = r px x+r r py dr.
r=0
Illustration:(x) survives to time r and then dies and (y) survives beyond r, giving:
r px x+r r py
?
(x) survives = r px (y) survives = r py
| -
z }| {
| | -
Age x x+r
y 175y + r
Note that since one of (x) and (y) has to die first:
1
t qxy + t qxy1 = t qxy .
2
We define t qxy as the probability that (x) dies within t years but after (y) has died.
Therefore:
1 2
t qx = t qxy + t qxy
from which: Z t
2
t qxy = r px x+r (1 r py ) dr.
0
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From this it can be shown that:
Z
A1xy = v r r px x+r r py dr.
0
Similarly, we can derive an expression for the EPV of a benefit of $1 payable immediately
on the death of (x) if it is after that of (y), denoted A2xy :
Z
A2xy = v r r px x+r (1 r py ) dr.
0
Ax = A1xy + A2xy .
If the two lives are the same age, and the same mortality table is applies to both, then:
1
A1xx = Axx
2
1
A1xx = Axx
2
1
A2xx = Axx
2
1
A2xx = Axx .
2
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6.5 Examples
Example 1
Find the expected present value of an annuity of $10,000 p.a. payable annually in advance
to a man aged 65, reducing to $5,000 p.a. continuing in payment to his wife, now aged 61,
if she survives him.
Basis:
EPV
m f
= 10, 000 am
65 + 5, 000 a65|61
m f
= 10, 000 (am
65 + 1) + 5, 000 a65|61
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= 10, 000 (7.4 + 1) + 5, 000 af61 am f
65:61
Since:
1 m f
am f
65:61 a m f m f m f
+ a66:60 + a64:62 + a64:60
4 66:62
1
= (6.392 + 6.519 + 6.709 + 6.854)
4
= 6.619.
Example 2
2
(a) Express n qxy in terms of single life probabilities and contingent probabilities
referring to the first death.
1
(b) Suppose x = 80x for 0 x 80,
180
2
evaluate 20 q40:50 .
Solution
(a) t qxy2
Z t
= r py y+r (1 r px ) dr
r=0
Z t Z t
= r py y+r dr r py y+r r px dr
r=0 r=0
= t qy t qxy1 .
(b) n qx = 1 n px
Z n
= 1 exp x+t dt
0
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Z n
1
= 1 exp dt
0 80 x t
n
= 1 exp {[log (80 x t)]0 }
80 x n
= 1 exp log
80 x
n
= .
80 x
182
2 1
20 q40:50 = 20 q50 20 q40:50
20 20 40 12 202
=
30 40 30
1
= .
6
Example 3
Consider a reversionary annuity of $1 p.a. payable quarterly in advance during the lifetime
of (y) following the death of (x). Show that the expected present value of this benefit is
approximately equal to:
1 1
ax|y + Axy .
8
Solution
183
(x) dies = x+t
?
(x) survives = t px (y) survives = t py
| -
(4)
z }| { and gets ay+t
| | -
Age x x+t
y y+t
Hence:
Z
(4)
EPV = v t t px x+t t py ay+t dt
0
Z
t 1
v t px x+t t py ay+t + dt
0 8
Z
= v t t px x+t t py ay+t dt
0
184
Z
1
+ v t t px x+t t py dt
8 0
1 1 1 1
= ax|y + Axy ax|y + Axy .
8 8
185