📘 AS2001 – Week 2: Life Insurance – Introduction
Lecturer: Dr. Helena Tan
Lecture Duration: 2 hours
Topic: Life Insurance Contracts and Basic Present Value Concepts
1. What is Life Insurance?
Life insurance is a contract that pays a benefit upon the death of the
insured.
It protects against the financial loss arising from death.
The amount and timing of the benefit depend on the type of policy.
🧠 Key concept: Benefits are paid upon death – a random time in the future.
📄 2. Types of Life Insurance Policies
Type Description Payment Timing
Term Pays if death occurs within a At end or moment of
Insurance specified period (e.g., 10 years) death within term
Whole Life Pays upon death, no matter when it At moment or end of
Insurance occurs year of death
Endowment Pays at death or if the insured
Whichever comes first
Insurance survives to the end of term
Pure Pays only if the insured survives
At end of term
Endowment the term
📐 3. Actuarial Notation for Life Insurance
Symbol Meaning
EPV of a whole life insurance benefit of 1 payable at
AxA_x
moment of death
Symbol Meaning
( A_x^{\
})
overline{n}
Aˉx\bar{A}_x EPV of benefit payable at exact time of death (continuous)
( A_{x:\
})
overline{n}
=vn⋅npx= v^n \cdot {}_np_x, EPV of a pure endowment
ExE_x
benefit
Where:
v=11+iv = \frac{1}{1+i} is the discount factor
ii: annual effective interest rate
🔢 4. Present Value of Life Insurance Benefits
Discrete Whole Life Insurance
Benefit paid at end of year of death
Ax=∑k=1∞vk⋅k−1px⋅qx+k−1A_x = \sum_{k=1}^{\infty} v^k \
cdot {}_{k-1}p_x \cdot q_{x+k-1}
Continuous Whole Life Insurance
Benefit paid at moment of death
Aˉx=∫0∞vt⋅tpx⋅μx+t dt\bar{A}_x = \int_0^\infty v^t \cdot {}_tp_x \
cdot \mu_{x+t} \, dt
🧠 Continuous models more accurately reflect the random nature of death but
are harder to evaluate directly.
🔄 5. Relationship Between AxA_x and Aˉx\bar{A}_x
Under constant force of mortality and interest:
Aˉx≈iδ⋅Ax\bar{A}_x \approx \frac{i}{\delta} \cdot A_x
Where δ=ln(1+i)\delta = \ln(1 + i) is the force of interest
🧮 6. Example Calculation (Discrete Term Insurance)
Given:
x=40x = 40, n=5n = 5
i=5%i = 5\%, v=0.9524v = 0.9524
k−1p40=0.98k−1{}_{k-1}p_{40} = 0.98^{k-1},
qx+k−1=0.02q_{x+k-1} = 0.02
Compute:
A405‾∣=∑k=15vk⋅k−1p40⋅q40+k−1A_{40}^{\overline{5}|} = \
sum_{k=1}^5 v^k \cdot {}_{k-1}p_{40} \cdot q_{40+k-1}
For k=1k = 1:
=0.9524⋅1⋅0.02=0.01905= 0.9524 \cdot 1 \cdot 0.02 = 0.01905
Repeat for k=2,3,4,5k = 2, 3, 4, 5; sum all values.
🧩 7. Insurance Timing Assumptions
Timing Notation Interpretation
End of year of
AxA_x Discrete model
death
Moment of Continuous
Aˉx\bar{A}_x
death model
End of policy Pure
ExE_x
term endowment
Death or ( A_{x:\
})
survival overline{n}
📌 Summary & Key Takeaways
Life insurance pays a benefit upon death; product type determines
when and if payment occurs.
Actuarial notation captures policy structure and valuation approach.
Present values depend on mortality assumptions and interest
rates.
Both discrete and continuous models are used in practice.
📚 Suggested Reading & Prep for Next Week
“Actuarial Mathematics” by Bowers et al. – Sections 4.1–4.4
Practice: Calculating AxA_x, Aˉx\bar{A}_x, and Axn‾∣A_x^{\
overline{n}|} under simplified assumptions
Prepare: Present value calculations in more complex life insurance
settings (Week 3)
