Life_Insurance_and_Annuities (part 1) stdt

99698 298 546 level premium two year term level

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Unformatted text preview: th a 2-year policy, Premium in year 1 > $275 Premium $275 Essentially, pre Premium in year 2 < $298 funding costs With this example, size of difference is small With whole life policies (UL) Difference can be large Gives rise to cash value Annuities Annuity Contracts Large and growing part of life insurance business Risk management perspective Protection against outliving resources Saving Perspective Tax advantaged method of saving Implicit returns are tax deferred How do you fund an annuity? Divide contract period in two Accumulation period where the Policyholder pays premiums Payout period where the Insurer makes payments If payout period begins upon purchase of contract, this is an If immediate annuity. immediate If there is an accumulation period prior to the payout period, If these are deferred annuities. these Payments may be made: All at once (single premium) Over time Fixed payments OR Flexible Payments Payout Period of Annuities Straight life (or life annuity) Annuity Certain (or Term Certain) Life annuity with period certain (or Term Life certain and life thereafter) Joint and last survivor End at death of two people Payment may be reduced after death of Payment first. first. Savings Feature Fixed annuities Two types of variable annuities Return credited varies with investment Return returns, however, insurer guarantees a minimum rate minimum Return credited varies with return on Return assets chosen by contract holder, no guarantee may exist guarantee Pricing Immediate Annuities Example: Find single premium for a $5,000 Example: life annuity for a 96 year old life Assume person dies by age 100 Interest rate = 10% Premium = PV of expected payments to Premium annuitant = $4,530 annuitant Probability of a 96 year-old surviving to Age x Probability = # alive at age x/# alive at 96. alive Pricing Immediate Annuities Probability of a 96-year-old surviving Expected Payment $5000 x prob. PV of Expected Payment 6050/9831 $3,077 $3,077 / 1.1 = $2,797 3145/9831 $1,600 $1,600 / 1.12 = $1,322 1076/9831 $547 $ 547 / 1.13 = $ 411 0 0 0...
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