MA516-816 Contingencies I

Section 10
Assurances and Annuities Involving Two Lives
Complete Notes

Objectives for this section:

 To analyse assurance benefits payable on the failure of joint life or last survivor status

 To analyse annuities payable during the survival of joint life or last survivor status

Reading for this section:

AEC tuition notes for CT5, Chapter 8, pages 14 to 31.

Whole of Life Joint Life Assurances

Example 1

Consider an assurance of 1 payable immediately on the first death of (x) and (y).

T
The present value of payments under this assurance can be represented by the random variable v xy ,
where Txy is the future joint lifetime as defined previously.

The actuarial notation defined for the expected value of this random variable is Axy .

Axy = E v xy    v t f xy  t  dt
T

0

  v t t pxy  x t: y t dt
0

 
E  v xy
    xy  
  v t 2 f t dt
T 2


0

   v2 
t
t pxy  x t: y t dt
0

v 
t
 Axy* at force of interest 2 , ie. *  e 2 t

Var v xy   Axy*   A xy 

T 2

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Exercise 1

Consider an assurance of 1 payable at the end of the year in which the first death of (x) and (y)
occurs.
(a) What is the random variable which represents the present value of payments under this
assurance?
(b) What do you think is the actuarial notation for the expected value of this random variable?
(c) Find an expression for the expected value and variance of the present value of payments under
this assurance.
(d) How would you evaluate your answer to (c)?
(e) How would you approximate Axy using your answer to (c)?

Solution 1
(a) The present value of payments is represented by the random variable where K xy is the
curtate future joint lifetime as defined previously.

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Temporary Joint Life Assurances

Consider an assurance of 1 payable on the first death of (x) and (y) if this occurs within n years.

The expected present value of this assurance if benefits are payable immediately on the first death is

n
A1   v t t pxy  x t: y t dt
xy:n| 0

The expected present value of this assurance if benefits are payable at the end of the year of the
first death is
n 1
A1   v k 1 k | qx: y
xy:n| k 0

Joint Life Pure Endowment

Consider a pure endowment of 1 payable at the end of n years if (x) and (y) are both still alive at
that time.

A 1 A 1  v n n pxy
xy:n| xy:n|

Joint Life Endowment Assurances

An endowment assurance is a combination of a pure endowment assurance and a term assurance.

A1  A 1  Axy:n|
xy:n| xy:n|

A1  A 1  Axy:n|
xy:n| xy:n|

Exercise 2

(a) What is the random variable, for which Axy:n| is the actuarial symbol for the expected value?

(b) What is the random variable, for which Axy:n| is the actuarial symbol for the expected value?

Solution 2

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Joint life annuities

Payable for Life

Consider an immediate annuity of 1 pa. payable continuously so long as both x and y survive.

The present value of payments under this annuity can be represented by the random variable aT ,
xy

where Txy is as defined previously. In actuarial notation the expected value of this random variable
is axy .

Exercise 3

Find expressions for the mean and variance of aT in terms of Axy

xy

Solution 3

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An alternative expression for the expected present value of a joint life annuity on the lives of  x 
and  y  payable continuously at the rate of 1 pa. for as long as they both live is


axy   vt t px: y dt
0

You can obtain this either by

(i) integration by parts of expression [1] above,

(ii) general reasoning, by considering the sum over future times of the expected cash flows.

The means and variances of the present values of annuities payable annually in advance and in
arrears are:

Payments in advance

Random variable: aK

xy 1
|

1  Axy
Expected value: axy 
d
A   Axy  
1  * 2
Variance: 2  xy
d  

Payments in arrears

Random variable: aK xy |
1  d   Axy
Expected value: axy 
d
Variance:
1  A*   A 2 
d2  xy xy 

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Limited Term

The expected present value of a temporary annuity of 1 pa. payable continuously throughout the
joint lifetime of  x  and  y  within n years is given by

n
axy:n|   v t t px: y dt
0
 
  v t px: y dt   v t t px: y dt
t

0 n

 axy  v n n px: y  vt t px  n: y  n dt
0

 axy  v n
n px: y .ax  n: y  n

Similarly,

axy:n|  axy  v n n px: y .ax  n: y  n

axy:n|  axy  v n n px: y .ax  n: y  n

Exercise 4

An annuity of 1 pa. is paid annually in arrears as long as Brenda survives, either jointly with
Nate or for 3 years after the death of Nate. By considering the projected cash flows, in the first
3 years and after 3 years, write down an expression for the expected present value of this
annuity.

Solution 4

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Last Survivor Assurances

For assurance benefits payable after the second death of x and y , and annuities payable while at
least one of of x and y are alive, we could go through the same approach we have just done for joint
life assurances.

However, you may have noticed that everything in this section so far has followed exactly the
patterns we have seen earlier for the single life case, but with x:y replacing x .

In fact, if Tu represents the time to failure of the status u, and fTu  t  is the probability density
function of Tu , then the same derivation applies to any status u. In the examples above, u was the
joint life status xy . But u could equally represent the last survivor status xy .

So we don’t need to go through everything again for the last survivor status xy . The only new
thing to note is that we can express all the functions based on the last survivor status xy by a
combination of functions based on the statuses x , y ¸and xy .

Exercise 5

Repeat the pattern of Example 1, but for an assurance of 1 payable immediately on the second
death of (x) and (y), and express the expected value and variance in terms of single life and joint
life functions.

Solution 5

The present value of payments under this assurance can be represented by the random variable
, where Txy is the future time during which at least one of (x) and (y) is alive, as defined previously.

The actuarial notation defined for the expected value of this random variable is

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Last Survivor Annuities

Similarly, last survivor annuities are payable while the status u is active, where u is the last
survivor status xy . We can write down any results we want for last survivor annuities by following
the same approach as we did for joint life annuities payable while the joint life status xy is active.

Again we note that we can express all the functions based on the last survivor status xy by a
combination of functions based on the statuses x , y ¸and xy .

Since t pxy = t px  t p y  t pxy

axy =ax  a y  axy

Limited Term last survivor annuities

The expected present value of a temporary annuity of 1 pa. payable continuously throughout the
survival of at least one of x  and  y  for a maximum of n years is given by

n
axy:n|   v t t px: y dt
0
n
  (v t t px  v t t p y  v t t px: y )dt
0

 ax:n|  a y:n|  axy:n|

Similarly,

axy:n|  ax:n|  ay:n|  axy:n|

Premium Conversion Formulae

The following relationships are referred to as “premium conversion formulae”. They enable you to
obtain assurance values and premiums using tabulated values for annuities only.

Axy  1  d axy
Axy 1
and Pxy   d
axy axy

The status xy could be replaced by any of the statuses x , y ¸ or xy

The relationships hold for:

 whole-life assurances with whole life annuities

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  endowment assurances with term annuities (for the same term, obviously!)

Provisions for Last Survivor Assurances

The policy value at duration t of a last survivor assurance will depend on whether one or two lives
survive to time t.

Exercise 6

What is the policy value at duration t of a whole life assurance policy of sum assured 1 payable at
the end of the year of the second death of x and y , with premiums payable annually in advance as
long as at least one life is alive?

Express your answer in functions which can be evaluated from the PMA tables in the Formulae and
Tables.

Solution 6

So that our answer can be evaluated, we need to express it in terms of single and joint life annuity
values.

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