MASTER EN CIENCIAS ACTUARIALES Y FINANCIERAS

SEGUROS DE VIDA

ASSURANCES
Definition of Assurance.
General definition
Single Future payment(C) paid if the life assured dies within a specific period or/and survives
to the end of a specific period.

Basic types of assurances

An n-year Pure Endowment provides for a payment at the end of n years if and only if the
insured survives at least n years since the time of policy issue.

An n-year Term Insurance provides for a payment only if the insured dies within the n-year
term of an insurance commencing at issue.

An n-year Endowment provides for an amount to be payable either following the death of the
insured or upon the survival of the insured to the end of the n-year term, whichever occurs first.

A Whole Life Insurance provides for a amount to be payable following the death of the
insured.

An m-year Deferred Insurance provides for a benefit following the death of the insured only
if the insured dies at least m years following policy issue.

Nature of Assurances
Future quantity or amount(C) payable depending on certain events related with the future
lifetime of a life aged (x).
a) Efect of the rate of interest: Discount factor V

V t ! !1 " i" !t ! e !!t

V! 1 ! ! ln!1 " i"
!1 " i"
We will always consider the present value of the future amounts.
b) Efect of the random variable: future lifetime of a life aged (x). When
 is it paid(if ever paid) ?

Formal Definition of Assurance

Let us define the present value of an insurance of amount C for a person aged (x) as the
following random variable

Z dx ! CV r!" x "
d
Discrete
Z x ! CV r!" x " Continuous

where r( ) is a function depending on the type of insurance written.

Discrete Assurances: Formal Definition,

Probability Distribution and Moments
As a rule of thumb, Discrete Assurances are always paid at the end of the year when death
occurs; and the random variable affecting the future payment moment will be the curtate future
lifetime of a life aged (x): " dx .

Moments and probability distribution for Discrete Assurances can be obtained straight from
the information contained in a Life Table.
For the moments calculation we will assume, for the sake of simplicity, that C ! 1.

n-year Pure Endowment

An n-year Pure Endowment provides for a payment at the end of n years if and only if the
insured survives at least n years since the time of policy issue.

CV " ! 0 " dx ! 0, 1, . . . , n ! 1
Z dx !
CV n " dx ! n, n " 1, . . .

with probability distribution

P#Z dx ! 0$ ! P#" dx # n ! 1$ ! nqx
P#Z dx ! CV n $ ! P#" dx # n ! 1$ ! npx

and moments
E%!Z dx " k & ! 0 k n q x " !CV n " k n p x

Assuming C ! 1,

E%Z dx & ! 0 1 n q x " V n n p x ! n

Ex ! A 1
x:n'

E%!Z dx " 2 & ! 0 2 n q x " !V n " 2 n p x

2
! e !2!n n p x ! nEx
2
Var%Z dx & ! nEx
! !nEx "2

Remark Notice that

 e !! ! V ! 1
!1 " i"
e !2! ! V2 ! 1 ! 1
!1 " i $ " !1 " i" 2
i $ ! i 2 " 2i

n-year Term Insurance

An n-year Term Insurance provides for a payment at the end of the year of death only if the
insured dies within the n-year term of an insurance commencing at issue.

CV 1 " dx ! 0
CV 2 " dx ! 1
CV 3 " dx ! 2
Z dx !
( (
CV n " dx ! n ! 1
CV " ! 0 " dx # n ! 1

or

CV " x "1
d
" dx ! 0, 1, . . . , n ! 1
Z dx !
CV " ! 0 " dx ! n, n " 1, . . .

with probability function

P#Z dx ! 0$ ! P#" dx # n ! 1$ ! p
n x
P#Z dx ! CV n $ ! P#" dx ! n ! 1$ ! n!1 p x q x"n!1
P#Z dx ! CV n!1
$! P#" dx ! n ! 2$ ! n!2 p x q x"n!2
(
P#Z dx ! CV 2 $ ! P#" dx ! 1$ ! p x q x"1
P#Z dx ! CV 1 $ ! P#" dx ! 0$ ! q x

and moments
n
E%!Z dx " k & ! %!CVj " k j!1 p x
q x"j!1 " 0 k n p x
j!1

Assuming C ! 1,
n
E%Z dx & ! % Vj p
j!1 x
q x"j!1 " 0 n p x ! A x:n'
1

j!1
n
E%!Z dx " 2 & ! %!V2 " j j!1 p x q x"j!1 " 0 2 n p x !
2
A x:n'
1

j!1
2 2
Var%Z dx & ! A x:n'
1 ! A x:n'
1
 n-year Endowment
An n-year Endowment provides for an amount to be payable either at the end of the year of
death of the insured or upon the survival of the insured to the end of the n-year term, whichever
occurs first.
It is the sum of a n-year tern insurance and a n-year pure endowment
Z dx (n-year endowment) ! Z dx (n-year term) " Z dx (n-year pure endowment)

The amount C will be always eventually paid, the problem is ”when?”.

CV 1 " dx ! 0
CV 2 " dx ! 1
Z dx ! CV 3 " dx ! 2
( (
CV n
" dx & n!1

or

CV " x "1
d
" dx ! 0, 1, . . . , n ! 2
Z dx !
CV n " dx ! n ! 1, n, . . .

with probability function

P#Z dx ! CV n $ ! P#" dx & n ! 1$ ! n!1 p x q x"n!1 " n p x
P#Z dx ! CV n!1 $ ! P#" dx ! n ! 2$ ! n!2 p x q x"n!2
(
P#Z dx ! CV $ ! P#" dx ! 1$ !
2
p
1 x
q x"1
P#Z dx ! CV 1 $ ! P#" dx ! 0$ ! q x

and moments
n
E%!Z dx " k & ! %!CVj " k j!1 p x
q x"j!1 " !CV n " k p
n x
j!1

Assuming C ! 1,
 n
E%Z dx & ! % Vj j!1 p x q x"j!1 " Vn n p x ! A x:n'
j!1

! A x:n'
1 " nEx
n
E%!Z dx " 2 & ! % V2j j!1 p x q x"j!1 " V2n n p x ! 2
A x:n'
j!1
2 2
! A x:n'
1 " nEx
2 2
Var%Z dx & ! A x:n' ! !A x:n' "
2 2 2
! 2
A x:n'
1 ! A x:n'
1 " E
n x
! n
Ex

! 2 A x:n'
1 E
n x

Whole Life Insurance

A Whole Life Insurance provides for a amount to be payable at the end of year of death of the
insured. Again, the amount C will be always eventually paid, the problem is ”when?”.

CV 1 " dx ! 0
CV 2 " dx ! 1
Z dx ! CV 3 " dx ! 2
( (
#!x"1
CV " dx ! #!x

or

Z dx ! CV " x "1
d
" dx ! 0, 1, . . . , # ! x

with probability distribution,

P#Z dx ! CV 1 $ ! P#" dx ! 0$ ! q x
P#Z dx ! CV 2 $ ! P#" dx ! 1$ ! 1px q x"1
(
!#!x""1
P#Z dx ! CV $ ! P#" dx ! # ! x$ ! #!x p x
q#
! #!x p x
P#Z dx ! CV !#!x"1""1 $ ! P#" dx ! # ! x " 1$ ! 0

and moments
#!x"1
E%!Z dx " k & ! % !CVj " k j!1 p x q x"j!1
j!1

Assuming C ! 1,
 #!x"1
E%Z& ! % Vj j!1 p x q x"j!1 ! A x
j!1
#!x"1
E%!Z dx " 2 & ! % V2j j!1 p x q x"j!1 ! 2
Ax
j!1
2
Var%Z dx & ! A x ! !A x " 2

Deferred Insurance: Whole Life

An m-year Deferred Insurance provides for a benefit at the end of the year of death of the
insured only if the insured dies at least m years following policy issue.

CV " ! 0 " dx ! 0, 1, . . . , m ! 1
CV m"1 " dx ! m
CV m"2 " dx ! m " 1
Z dx !
CV m"3 " dx ! m " 2
( (
CV #!x"1 " dx ! # ! x

or

CV " ! 0 " dx ! 0, 1, . . . , m ! 1
Z dx !
CV " x "1
d
" dx ! m, m " 1, . . . , # ! x

with probability distribution,

P#Z dx ! CV m"1 $ ! P#" dx ! m$ ! p
m x
q x"m
P#Z dx ! CV m"2
$! P#" dx ! m " 1$ ! p
m"1 x
q x"m"1
(
P#Z dx ! CV !#!x""1 $ ! P#" dx ! # ! x$ ! #!x p x q#
! #!x p x
P#Z dx ! CV !#!x"1""1 $ ! P#" dx ! # ! x " 1$ ! 0

and moments
#!x"1!m
E%!Z dx " k & ! % !CV !m"j" "
k
p
m"j!1 x
q x"m"j!1
j!1
#!x"1!m
! % !CV !j" "
k
p
m"j!1 x
q x"m"j!1
j!1
#!x"1!m
! !V " m k
mpx % !CV j "
k
j!1 p x"m q x"m"j!1
j!1

Assuming C ! 1,
 #!x"1!m
E%Z dx & ! m|
Ax ! m
Ex % Vj j!1 p x"m q x"m"j!1 ! m
E x A x"m ! m
|A x
j!1
#!x"1!m
E%!Z dx " 2 & ! m|
2
Ax !
2
E
m x % V 2j p
j!1 x"m
q x"m"j!1 !
2 2
E A x"m
m x
j!1
2 2 2
Var%Z dx & ! mEx A x"m ! mEx A x"m

Other Relations
Factor of financial-actuarial discount: mEx ! D x"m
Dx
! Vm m p x
Term and deferred and Whole life insurances
Z dx (whole life) ! Z dx (m-year term) " Z dx (m-year deferred)
A x ! A x:m'
1 " m |A x

A x:m'
1 ! Ax ! mEx A x"m
2 2 2
2
A x:m'
1 ! Ax ! E A x"m
m x

Continuous Assurances: Formal Definition,

Probability Distribution and Moments
As a rule of thumb, Continuous Assurances are always paid exactly at the instant of death; and
the random variable affecting the future payment moment will be the continuous future lifetime of a
life aged (x): " x . This approach is more realistic.
For the moments calculation we will assume, for the sake of simplicity, that C!1.

n-year Term Insurance

An n-year Term Insurance provides for a payment right after death only if the insured dies
within the n-year term of an insurance commencing at issue.

CV " x "x # n
Zx !
CV " ! 0 "x # n

with distribution function,

P#Z x ! 0$ ! P#" x # n$ ! npx
"x
F Z !CV " ! P#Z x ! CV
y
# CV y $
! P#" x # y$ ! S x !y" y ' !0, n&
Assuming C ! 1,

( 0 !Vy " k f x !y"dy

n
E%!Z x " k & ! " 0k npx

notice that
f x !y" ! ypx
$ x"y
and
!
( 0 Vy f x !y"dy
n
E%Z x & ! " 0 n p x ! A x:n'
1

!
( 0 e !2!y f x !y"dy
n 2
E%!Z x " 2 & ! " 02 npx ! A x:n'
1

! ! 2
2
Var%Z x & ! A x:n'
1 ! A x:n'
1

n-year Endowment
An n-year Endowment provides for an amount to be payable either at the instant of death of
the insured or upon the survival of the insured to the end of the n-year term, whichever occurs first.

CV " x "x # n
Zx !
CV n
"x # n

with distribution function

P#Z x ! CV " x # CV y $ ! P#" x # y$ ! p
y x

F Z !CV y " ! ypx ! S x !y" y ' !0, n"

F Z !Z x ! CV n " ! P#" x # n$
Assuming C ! 1,

( 0 !Vy " k f x !y"dy

n
E%!Z x " k & ! " !V n " k n p x

and
!
( 0 Vy f x !y"dy
n
E%Z x & ! " V n n p x ! A x:n'
2 !
( 0 e !2!y f x !y"dy
n
E%!Z x " 2 & ! " V 2n n p x ! A x:n'
! ! 2
2
Var%Z x & ! A x:n' ! A x:n'

Whole Life Insurance

A Whole Life Insurance provides for a amount to be payable at the instant of death of the
insured. Again, the amount C will be always eventually paid, the problem is ”when?”.
Z x ! #CV " x $

with distribution function

P#Z x ! CV " x # CV y $ ! P#" x # y$ ! ypx

F Z !CV y " ! ypx

! S x !y"

Assuming C ! 1,
#!x
E%!Z x " k & ! (0 !V y " k f x !y"dy

and
 #!x !
E%Z x & ! (0 V y f x !y"dy ! A x
#!x !
E%!Z x " 2 & ! (0 e !2!y f x !y"dy !
2
Ax
! ! 2
2
Var%Z x & ! Ax ! Ax

Deferred Insurance: Whole Life

An m-year Deferred Insurance provides for a benefit at the instant of death of the insured
only if the insured dies at least m years following policy issue.

CV " ! 0 "x # m
Zx ! "x
CV "x # m

with distribution function

P#Z x ! CV " x # CV y $ ! P#" x # y$ ! p
y x
y ' !m, # ! x"
F Z !0" ! q
m x

Assuming C ! 1,
#!x
E%!Z x " k & ! (m !V y " k f x !y"dy " 0 k m q x

and
! #!x
E%Z x & ! m| Ax ! (m V y f x !y"dy
#!x #!x!m
! (m V y y p x $ x"y dy ! (0 V !m"y" p
!y"m" x
$ x"y"m dy
#!x!m !
! Vm m p x (0 V y y p x"m $ x"y"m dy ! mEx A x"m
2 !
#!x !
E%!Z x " 2 & ! (m e !2!y f x !y"dy ! Ax !
2
E
m x
2
A x"m
! ! 2
2 2
Var%Z x & ! mEx
A x"m ! mEx A x"m

Other Relations
Term and deferred and Whole life insurances
Z x (whole life) ! Z x (m-year term) " Z x (m-year deferred)
! ! !
A x ! A x:m'
1 " m |A x
! ! !
A x:m'
1 ! Ax ! mEx
A x"m
!
2 ! 2 2 !
2
A x:m'
1 ! Ax ! mEx
A x"m

Relations between the discrete and

continuous case.
 As it happened before with the study of the probability distribution of the futere lifetime of a
life aged (x): We can obtain the moments and probability distribution of the Discrete Assurances
based on the information contained in the Life Table. Nevertheless, the continuous consideration,
benefit payable at the moment of death, is much more realistic.
How can we get the moments of the probability distribution of the random variable: Z x
(present value of an n-year term insurance) using a Life Table?

( 0 !Vy " k f x !y"dy

n
E%!Z x " k & ! E%!Z x " k & !
n!1
% (j
j"1
! !V y " k f x !y"dy
j!0
n!1
% ( 0 !V!j"y" " k f x !j " y"dy
1
!
j!0
n!1
% ( 0 !V!j"y" " k f x !j " y"dy
1
! #
j!0

Let us remember some formulas,

f x !j " y" ! p
j"y x
$ x"j"y ! j p x y p x"j $ x"j"y
! j p x f x"j !y" y ' !0, 1"

Now, with the assumption of uniform distribution of deaths or linear interpolation,

f x !j " y" ! j p x f x"j !y" ! j p x q x"j
y ' !0, 1"
Going back to ref: bachlein
 n!1
% ( 0 !V!j"y" " k f x !j " y"dy
1
E%!Z x " & !
k

j!0
n!1
% Vjk jp x q x"j ( 0 Vky dy
1
!
j!0
n!1
! % V !j"1"k ! V jk
jp x q x"j
j!0
ln!V k "
n!1
! 1
k!
%!Vjk ! V!j"1"k " jp x q x"j
j!0
n!1 n!1
! 1
k!
% Vjk jp x q x"j ! % V!j"1"k jp x q x"j
j!0 j!0
n!1 n!1
! 1
k!
1
Vk
%V !j"1"k
p
j x
q x"j ! % V !j"1"k j p x q x"j
j!0 j!0

! 1 %!1 " i" k E%!Z d " k & ! E%!Z d " k &&

x x
k!
!1 " i" k ! 1
! E%!Z dx " k &
k!
It is easy to see that this result is also valid for the Whole Life Insurance.
Finally,
! !
Ax ! i Ax; A x:n'
1 ! i A1
! ! x:n'
! !
2
Ax ! i 2 " 2i 2
Ax; 2 A x:n'
1 ! i " 2i
2 2
A x:n'
1
2! 2!

Other Types of Assurances.

Increasing: Discrete n-term Insurance

CV 1 " dx ! 0
!C " 1"V 2 " dx ! 1
!C " 2"V 3 " dx ! 2
Z dx !
( (
!C " n ! 1"V n
" dx ! n!1
CV " ! 0 " dx # n ! 1

or
 !C " " dx "V " x "1
d
" dx ! 0, 1, . . . , n ! 1
Z dx !
CV " ! 0 " dx ! n, n " 1, . . .

with probability function

P#Z dx ! 0$ ! P#" dx # n ! 1$ ! p
n x
PP#Z dx ! !C " n ! 1"V n $ ! P#" dx ! n ! 1$ ! n!1 p x q x"n!1
P#Z dx ! !C " n ! 2"V n!1 $ ! P#" dx ! n ! 2$ ! n!2 p x q x"n!2
(
P#Z dx ! !C " 1"V 2 $ ! P#" dx ! 1$ ! p x q x"1
P#Z dx ! CV 1 $ ! P#" dx ! 0$ ! q x

and moments
n
E%!Z dx " k & ! %!!C " j ! 1"Vj " k p
j!1 x
q x"j!1 " 0 k n p x
j!1

Assuming C ! 1,
n
E%Z dx & ! % jVj p
j!1 x
q x"j!1 " 0 n p x ! !IA" x:n'
1

j!1
n!1
! % l
|A x:n!l'
1

l!0