Calculating the Present Value of the Expected Future Payments

Oct 13, 2025 by wbrum.org 127 views

Introduction

In this article, we will delve into the world of actuarial mathematics and explore a special discrete 20-year deferred life insurance policy. This policy is issued to an individual at the age of 40, with a unique death benefit structure that increases by 2% per year. We will analyze the policy's features and calculate the present value of the expected future payments using the given parameters.

Policy Parameters

The policy parameters are as follows:

Age at issue: 40
Death benefit: 1,000, increasing by 2% per year
Interest rate: d = 10%
Discount rate: do = 0.03
Policy term: 20 years
Age at policy maturity: 60

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

However, in this case, we have a deferred life insurance policy, which means that the policyholder will not receive any payments until the policy matures. Therefore, we need to use the formula for the present value of a deferred life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

Introduction

Policy Parameters

The policy parameters are as follows:

Age at issue: 40
Death benefit: 1,000, increasing by 2% per year
Interest rate: d = 10%
Discount rate: do = 0.03
Policy term: 20 years
Age at policy maturity: 60

Calculating the Present Value of the Expected Future Payments

To calculate the present value of the expected future payments, we need to use the formula for the present value of a life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Q&A

Q: What is a deferred life insurance policy?

A: A deferred life insurance policy is a type of life insurance policy that does not provide any payments until the policy matures. In this case, the policyholder will not receive any payments until they reach the age of 60.

Q: How does the death benefit increase by 2% per year?

A: The death benefit increases by 2% per year because the policyholder is paying premiums for 20 years, and the death benefit is calculated based on the policyholder's age at the time of death.

Q: What is the formula for calculating the present value of the expected future payments?

A: The formula for calculating the present value of the expected future payments is:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Q: How do we calculate the present value of the expected future payments for a deferred life insurance policy?

A: To calculate the present value of the expected future payments for a deferred life insurance policy, we need to use the formula for the present value of a deferred life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Q: What is the significance of the interest rate and discount rate in calculating the present value of the expected future payments?

A: The interest rate and discount rate are used to calculate the present value of the expected future payments. The interest rate is used to calculate the future value of the payments, while the discount rate is used to calculate the present value of the future payments.

Q: How do we determine the policy term and age at policy maturity?

A: The policy term and age at policy maturity are determined by the policy parameters. In this case, the policy term is 20 years, and the age at policy maturity is 60.

Q: What is the present value of the expected future payments for this policy?

A: To calculate the present value of the expected future payments, we need to use the formula for the present value of a deferred life annuity:

PV = ∑[PMT * v^(t-x)] from x to t

where:

PV = present value
PMT = payment amount
v = discount factor
t = policy term
x = age at policy maturity
t = age at policy maturity

Using the given parameters, we can calculate the present value of the expected future payments as follows:

PV = ∑[1,000 * (1.02)^(t-40)] from 40 to 60

PV = 1,000 * (1.02)^20

PV = 1,000 * 2.208

PV = 2,208

Therefore, the present value of the expected future payments for this policy is 2,208.

Q: What is the significance of the present value of the expected future payments?

A: The present value of the expected future payments is a measure of the value of the policy to the policyholder. It represents the amount of money that the policyholder can expect to receive from the policy in the future, discounted to its present value.

Q: How does the present value of the expected future payments relate to the policy's features?

A: The present value of the expected future payments is related to the policy's features, such as the death benefit, interest rate, and discount rate. The policy's features determine the amount of money that the policyholder can expect to receive from the policy in the future, which is then discounted to its present value.

Q: What are the implications of the present value of the expected future payments for the policyholder?

A: The present value of the expected future payments has implications for the policyholder, such as the amount of money that they can expect to receive from the policy in the future. It also affects the policyholder's decision to purchase the policy, as they need to consider the present value of the expected future payments when making their decision.

Q: How does the present value of the expected future payments relate to the policy's cost?

A: The present value of the expected future payments is related to the policy's cost, as the policyholder needs to pay premiums for the policy. The present value of the expected future payments represents the amount of money that the policyholder can expect to receive from the policy in the future, which is then used to calculate the policy's cost.

Q: What are the implications of the present value of the expected future payments for the insurance company?

A: The present value of the expected future payments has implications for the insurance company, such as the amount of money that they need to pay out to the policyholder in the future. It also affects the insurance company's decision to offer the policy, as they need to consider the present value of the expected future payments when making their decision.

Q: How does the present value of the expected future payments relate to the policy's risk?

A: The present value of the expected future payments is related to the policy's risk, as the policyholder's death benefit is increased by 2% per year. This means that the policyholder's death benefit is more likely to be paid out in the future, which increases the policy's risk.

Q: What are the implications of the present value of the expected future payments for the policy's risk?

A: The present value of the expected future payments has implications for the policy's risk, as the policyholder's death benefit is increased by 2% per year. This means that the policyholder's death benefit is more likely to be paid out in the future, which increases the policy's risk.

Q: How does the present value of the expected future payments relate to the policy's value?

A: The present value of the expected future payments is related to the policy's value, as it represents the amount of money that the policyholder can expect to receive from the policy in the future. The policy's value is determined by the present value of the expected future payments, as well as other factors such as the policy's features and the policyholder's risk tolerance.

Q: What are the implications of the present value of the expected future payments for the policy's value?

A: The present value of the expected future payments has implications for the policy's value, as it represents the amount of money that the policyholder can expect to receive from the policy in the future. The policy's value is determined by the present value of the expected future payments, as well as other factors such as the policy's features and the policyholder's risk tolerance.

Q: How does the present value of the expected future payments relate to the policy's cost-benefit analysis?

A: The present value of the expected future payments is related to the policy's cost-benefit analysis, as it represents the amount of money that the policyholder can expect to receive from the policy in the future. The policy's cost-benefit analysis is determined by the present value of the expected future payments, as well as other factors such as the policy's features and the policyholder's risk tolerance.

Q: What are the implications of the present value of the expected future payments for the policy's cost-benefit analysis?

A: The