Manual For SOA Exam MLC.: Chapter 5. Life Annuities. Section 5.4. N-Year Certain Annuities

Chapter 5. Life annuities.
Manual for SOA Exam MLC.

Chapter 5. Life annuities.
Section 5.4. n–year certain annuities.
2009.
c Miguel A. Arcones. All rights reserved.
Extract from:
”Arcones’ Manual for the SOA Exam MLC. Fall 2009 Edition”.
available at http://www.actexmadriver.com/
1/10
2009.
c Miguel A. Arcones. All rights reserved. Manual for SOA Exam MLC.
Chapter 5. Life annuities. Section 5.4. n–year certain annuities.
n–year certain life annuity–due
Definition 1
A n–year certain due life annuity pays at the beginning of the
year while either the individual is alive or the number of payments
does not exceed n.
Under the n–year certain due life annuity, the first n payments are
guaranteed.
Definition 2
The present value of a n–year certain due life annuity for (x) with
unit payment is denoted by Ÿx:n| .
Definition 3
The actuarial present value of a n–year certain due life annuity for
(x) with unit payment is denoted by äx:n| .
We have that äx:n| = E [Ÿx:n| ].
2/10
2009.
Theorem 1
We have that
∞
X
1
Ÿx:n| = ämax(n,Kx )| = än| + n |Ÿx = än| + Zx:k| ,
k=n
∞
X ∞
X
äx:n| = än| · n qx + äk| · k−1 |qx = än| + n |äx = än| + v k · k px ,
k=n+1 k=n
Var(Ÿx:n| ) = Var(n |Ÿx ).
3/10
2009.
Theorem 1
We have that
∞
X
1
Ÿx:n| = ämax(n,Kx )| = än| + n |Ÿx = än| + Zx:k| ,
k=n
∞
X ∞
X
äx:n| = än| · n qx + äk| · k−1 |qx = än| + n |äx = än| + v k · k px ,
k=n+1 k=n
Var(Ÿx:n| ) = Var(n |Ÿx ).
Proof: Since payments go until max(n, Kx ), Ÿx:n| = ämax(n,Kx )| . If

Kx ≤ n, the obtained cashflow consists of n payments. If Kx > n,
the obtained cashflow consists of n payments as well as n deferred
payments until the end of the year of death. Hence,
Ÿx:n| = än| + n |Ÿx .
4/10
2009.
Example 1
A special pension plan pays $30000 at the beginning of the year
guaranteed for 10 years and continuing thereafter per life. Suppose
that i = 0.06 and mortality follows the life table in the manual.
Calculate the APV of this life insurance for (65).
5/10
2009.
Example 1
A special pension plan pays $30000 at the beginning of the year
guaranteed for 10 years and continuing thereafter per life. Suppose
that i = 0.06 and mortality follows the life table in the manual.
Calculate the APV of this life insurance for (65).
Solution: ä10|0.06 = 7.801692274. From the table, A75 = 0.52383.
Hence, ä75 = 1−0.52383
6/106 = 8.412336667. From the table,
`65 = 83114 and `75 = 66605. So,
1 = 66605 (1.06)−10 = 0.4474803778. Hence,
A65:10| 83114
|ä
10 65 = (0.4474803778)(8.412336667) = 3.76435559. The APV
of this insurance is
(30000)(ä10|0.06 + 10 |ä65 ) = (30000)(7.801692274 + 3.76435559)

=346981.4359.
6/10
2009.
n–year certain life annuity–immediate
Definition 4
A n–year certain life annuity–immediate pays at the end of the
year while either the individual is alive or the number of payments
does not exceed n.
Under the n–year certain immediate life annuity, the first n
payments are guaranteed.
Definition 5
The present value of a n–year certain immediate life annuity for
(x) with unit payment is denoted by Yx:n| .
Definition 6
The actuarial present value of a n–year certain immediate life
annuity for (x) with unit payment is denoted by ax:n| .
We have that ax:n| = E [Yx:n| ].
7/10
2009.
Theorem 2
We have that
∞
X
1
Yx:n| = amax(n,Kx−1 )| = an| + n |Yx = an| + Zx:k| = Ÿx:n+1| − 1,
k=n+1
∞
X
ax:n| = an| · n qx + ak−1| · k−1 |qx = an| + n |ax
k=n+1
∞
X
=an| + v k · k px = äx:n+1| − 1,
k=n+1
Var(Yx:n| ) = Var(n |Yx ).
8/10
2009.
n–year certain life continuous annuity
Definition 7
A n–year certain continuous life annuity makes continuous
payments while either an individual is alive or the length of the
period of payments does not exceed n.
Definition 8
The present value of a n–year certain continuous life annuity for
(x) with unit rate is denoted by Y x:n| .
Definition 9
The actuarial present value of a n–year certain continuous life
annuity for (x) with unit rate is denoted by ax:n| .
We have that ax:n| = E [Y x:n| ].
9/10
2009.
Theorem 3
We have that
Y x:n| = amax(n,Tx )| = an| + n |Y x ,

Z ∞
ax:n| = an| · n qx + at| · t px µx+t dt = an| + n |ax
n
Z ∞
=an| + v t · t px dt,
n
Var(Y x:n| ) = Var(n |Y x ).
10/10
2009.

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Chapter 5. Life annuities.

Manual for SOA Exam MLC.

n–year certain life annuity–due

Var(Ÿx:n| ) = Var(n |Ÿx ).

Var(Ÿx:n| ) = Var(n |Ÿx ).

Proof: Since payments go until max(n, Kx ), Ÿx:n| = ämax(n,Kx )| . If

(30000)(ä10|0.06 + 10 |ä65 ) = (30000)(7.801692274 + 3.76435559)

n–year certain life annuity–immediate

n–year certain life continuous annuity

Y x:n| = amax(n,Tx )| = an| + n |Y x ,

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