Use Mortality Table to calculate the minimum premium an insurance company should charge for a $1...

Use Mortality Table to calculate the minimum premium an insurance company should charge for a $1 million two-year term life insurance policy issued to a woman aged 50. Assume that the premium is paid at the beginning of each year and that the interest rate is zero.

Expert Solution

Life insurance premium depends on the mortality, rates, interest rates and other expenses to be incurred by the insurance. The mortality rate indicates the probability of a person belonging to a certain age group dying before his or her birthday. Thus if a person dies before the term insurance end there will be a claim on the insurance company which will result in a cash outflow. Thus pricing of the insurance premium depends on the expected cash outflows (probability x sum insured) and other expenses discounted using an appropriate interest rate

In the given case the person is a woman aged 50 and sum insured is $ 1million . The probability of the woman dying in the next 2 years as per mortality table is given below

Age 51 Probability of dying for a female 0.003491

Age 52 Probability of dying for a female 0.003801

Hence Beginning of year 1 the premium to be charged is 1,000,000 x 0.003491 = $ 3,491

Beginning of year 2 the premium to be charged is 1,000,000 x 0.003801 = $ 3,801

Since interest rate is assumed to be zero discounting is not done.

jeff jeffy answered 2 years ago

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