ASC305

WEEK 7
NET PREMIUMS_3

DR. MOHD ZAKI AWANG CHEK

Senior Lecturer.
Center for Actuarial Studies,
FSKM, UiTM
 TOPIC 3
NET PREMIUMS
 RETURN OF PREMIUM POLICY

• A Life Insurance contract may provide for the return, at the time of death of the insured, of all the net premiums which he has paid.

• This special benefit (return) is given in addition to the payment of the face amount of insurance.

• Consider an ordinary life policy which provides for the payment at the death of the insured.

• The face amount RM 1 together with the return, without interest, of all the net premiums paid by the insured prior to his death.

• Let P is denoting the net annual premium for this contract.

(1+P) (1+2P) (1+3P) ………….

0 1 2 3 …………

• The death of the insured during the first policy year the company agrees to pay the face amount RM 1 and return the first premium P.
• Thus the total amount payable in event of death in the first policy year is (1+P). The death of the insured during the second policy year the company

pays the face amount RM 1 in addition to the return of two net premiums, which the insured paid at the beginning of the first and second year of

policy is (1+2P). Similarly, the total amount of insurance during the third policy is (1+3P), the fourth year (1+4P) and so on, increasing by P per

year.

• The return of the net premiums forms an increasing insurance.

• Since, the present value of the net premiums must equal the present value of the benefit.

x  Ax  P.IAx 
P.a

• Define the commutation symbols for the net premium P, such that

P A  M x x

  IA  N  R
a x x x x
 EXAMPLE RETURN OF PREMIUM POLICY

• Express in terms of commutation symbols the net annual premium for a twenty-payment life policy issued at age x which provides,
in event of the death of the insured during the first twenty policy years, for the return, without interest of all net premium paid in
addition to the face amount RM 1

   20
 x  Ax  P IA x
P.a
x:x  20  Ax  P IA x:x  20
P.a
Ax
P
x:x  20
a  IA x:x  20
Mx
Dx

N x  N x  20 Rx  Rx  20  20 M x  20

Dx Dx
Mx

N x  N x  20  Rx  Rx  20  20 M x  20
• A life annuity contract, issued at age 30, provides for the payment of RM 1000 a year, first payment at age 60. The annuity is to be
purchased by annual premiums payable for thirty years. In event of the death of the policyholder prior to age 60, the net premiums

already paid are to be returned, without interest. Compute the net premium .

P P P P ……. RM 1000 RM 1000

30 31 32 33 . . . . . . . 60
 60 .30 E 30  P IA 30:30
30:30  1000a
Pa
1000a 60 .30 E 30
P

30:30  IA30:30
a 
N 60 D60
1000 .
D60 D30
P
N 30  N 60 R  R60  30 M 60
 30
D30 D30
1000 N 30
P
N 30  N 60  R30  R60  30 M 60
1000(16510078.8)
P
91698461.8  165100078.8  44393767.111  11937367 .776  30(825847.722)
1.65100788  1010
P
67507415.32
P  244.5668927
 EXERCISE RETURN OF PREMIUM POLICY

• A single premium whole life policy issued at age x provides for the return, without interest, of the net single premium together with
the payment of the face amount RM 1 at the death of the insured.

• Compute the net single premium for x = 35.

( ANSWER : a)0.55924 )
• A certain single premium contract provides for a pure endowment of RM 1000 payable if (x) survives n years. In event of the death
of (x) before age x + n the single premium is to be returned without interest. Express the net single premium in terms of
commutation symbols.

1000 D x  n

• (ANSWER : D x
M xM
) xn
 INCREASING INSURANCE

• Consider a whole life insurance policy in which the benefit increases annually so that RM1 is payable if the insured die in the first policy year,
RM2 are payable if the insured dies in the second year, RM3 are payable if the insured dies in the third year, and so on. Other consideration, sum
of several level whole life benefits of RM1 each, the first to begin immediately, the second deferred one year, and the third deferred two years,
and so on. If the net single premium for such an increasing insurance benefit issued at age x is denoted by ,

( IA) x  Ax 1 | Ax  2 | Ax  3 | Ax  ...    1 | Ax
Mx M x 1 M x2 M  1
    ... 
Dx Dx Dx Dx
 M x  M x 1  M x  2  ...  M  1
(IA) x 
Dx
• Define the commutation symbol Rx, such that,

Rx  M x  M x 1  M x  2  ...  M  1
• The net single premium for the increasing whole life insurance policy can now be written

Rx
( IA) x 
Dx
• The net single premium for the increasing term insurance policy can now be written

Rx  Rx  n  n ( M x  n )
( IA)' x : n 
Dx
 Example
1) A certain life policy issued at age 45 provides for the following schedule of amounts payable in event of death :

Year 1 2 3 4 5 6 7 8 9 Thereafter

Amount 1000 1200 1400 1600 1800 2000 1500 1000 500 0

Compute the net single premium for the above policy.

Solution:
Year Amount +1000M45 +200R46 -700R51

45 1000 1000

46 1200 1000 200

47 1400 1000 400

48 1600 1000 600

49 1800 1000 800

50 2000 1000 1000

51 1500 1000 1200 700

52 1000 1000 1400 1400

53 500 1000 1600 2100

54 0 1000 1800 2800

 1
NSP  1000 A  200 ( IA) 46:9 1 E 45  700 ( IA) 51:4  6 E 45
45:10

 M M         
 1000  45 55   200 R46  R55  9  M 55     D46   700 R51  R55  4  M 55     D51 
 D45   D45  D   D51  D 
     45     45 
158730887156354071.6 131767557.6

292904.8

 RM 76.61
2)

Benefits

Age Death Survival

30 200

31 400

32 600

33 800

34 1000

35-40 5000

41 0 10000
Write the commutation functions for the policy with premiums are paid quarterly per year for five years?
Solution:

Age Death Survival +200R30 -200R35 +4000M35

30 200 200
31 400 400
32 600 600
33 800 800
34 1000 1000
35 5000 1200 200 4000
36 5000 1400 400 4000
37 5000 1600 600 4000
38 5000 1800 800 4000
39 5000 2000 1000 4000
40 5000 2200 1200 4000
41 0 10000 2400 1400 4000
 1
200 ( IA ) 30 :11 200 ( IA ) 35 :6 5 E 30 4000 A35  E 30 10000
:6 5 11 E 30
P 
  4 
a
30:5

200  R 30  R 4111 M 41  200  R35  R41  6 M 41  D

 35

  4000 M 35  M 41
D
 35
 
  10000  D41


  D  D  D 
D30 D35  30  D35  30   30 

N 30  N 35 3 
 1 D35



D30 8 
 D30 

200  R30  R41 11 M 41  200  R 35  R 41 6 M 41  4000 M 35  M 41 10000 D41

3 
N 30  N 35    D30  D35  
8 
200 R30  5000 M 41  200 R35  4000 M 35 10000 D41

3 
N 30  N 35    D30  D35  
8 
EXERCISE
1) Find P the premium amount paid per year .

X Death benefit Survival Premium

30 P P

31 2P P

32 3P P

33 3P

34 3P

35 0 10000
2) What is the value for the above policy if he (30) purchased such policy in five years semiannual payments?

Benefits

Age Death Survival

30 200

31 400

32 800

33 1600

34 2400

35-50 3000

51 0 2000