Life Insurance Contracts

Net Single Premium

Life insurance contracts may be classified according to the

condition upon which payment of the insurance amount depends
as follows:

I. Contracts under which the insurance amount becomes payable

upon survival only.
II. Contracts under which the insurance amount becomes payable
upon death only.
III. Contracts that are a combination of the previous two types
(I & II).

Contracts under which the insurance amount becomes payable

upon survival are divided into:

I. Pure Endowment:
Under which the insured receives the insurance amount
only once at the end of the specified period, provided that the
insured is alive at that time.
II. Annuities:
Contracts that provide a fixed income during the
remainder of the person’s (insured) life.

In these types of previous contracts, we will know that:

• The insured pays Net Single Premium (NSP) on the date the
contract is issued. That is, it is paid only once on the date of
purchasing the insurance contract, and this premium is
invested by the insurer. We have represented it with the
symbol (A).

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 • The single net premium (NSP) covers the risk only, without
taking into account the profits and expenses of the insurance
companies.

• The insurer "the insurance company" pays one or more

amounts, (sum assured) or face amount at the due date of the
risk, (survival, death & endowment), and this is represented by
the symbol (R).

• The Periodic premiums are either annually, quarterly or

monthly, and usually annually. In all cases, the payment of
premium is always calculated in advance, and the first payment
is due on the date of issue of the contract, as well as at the
beginning of each period, in ordinary, or limited payment,
contracts.

The elements included in the premium calculation are:

1. Sum assured (face amount) (R).

2. Possibilities (𝑃𝑥 , 𝑞𝑥 ).
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3. The rate of interest (𝑉 𝑛 ) = (1+𝑖)𝑛
The above three elements determine the net premium.
4. Loading expenses, such as: commissions, medical examination,
salaries, rents, telephones, etc.
If we add element “4” to the net premium, we get the “gross”
premium.

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 (A) Contracts Payable on Survival Only (Net Single Premiums)

I- Pure Endowment Contracts:

In this type of contract, we will know that:

- The insured paid premium (Net single premium) only once at

the date of issue of the contract.
- Net single premium (NSP) can be calculated through the
following equation:

1 𝑫𝒙+𝒏
𝑵𝑺𝑷 = 𝑨𝒙 : =𝑹×
n 𝑫𝒙

Where:
NSP: Net Single Premium

𝐴𝑥 : 1 : Contract symbol
n

𝑥: the age of insured at the date issue the contract

𝑛: the period of the contract
𝑅: Insurance amount (face amount).

If a person aged (𝑥) buys an insurance contract, so that he receives

an insurance amount of (R) pounds, if this person still alive after (𝑛)
years, starting from the beginning of the contract. That is, until he
reaches the age of (𝑥 + 𝑛). This type of contract is called a “Pure
Endowment contract”.

Table used in calculations:

𝒙 𝑫𝒙 𝑵𝒙 𝑪𝒙 𝑴𝒙
Survival
Age Single ‫ـــــــــــ‬ Death
Annuities
payment

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Example 1
Calculate the net single premium to the pure endowment policy that,
the sum assured 5000 pounds, bought by a person of age (35) years
for a period (15) years.

Solution

𝑅 = 5000 𝑝𝑜𝑢𝑛𝑑𝑠
𝑥 = 35, 𝑛 = 15, 𝑥 + 𝑛 = 50 𝑦𝑒𝑎𝑟𝑠.

R = 5000

X = 35 years X +n = 50 years

𝑫𝒙+𝒏
𝑵𝑺𝑷 = 𝑹 ×
𝑫𝒙
𝑫𝟓𝟎
𝑵𝑺𝑷 = 𝟓𝟎𝟎𝟎 ×
𝑫𝟑𝟓

𝟐𝟓𝟒𝟗𝟑𝟐𝟒
𝑵𝑺𝑷 = 𝟓𝟎𝟎𝟎 ×
𝟑𝟗𝟒𝟗𝟖𝟓𝟏

𝑵𝑺𝑷 = 𝟑𝟐𝟐𝟕 pouds

Example 2
A person aged 25 years pays 1000 pounds to a life company for 30
years, pure endowment contract. How much the sum assured will
that person receive at age 55 if then alive?

Solution
𝑅 = ??
𝑥 = 25, 𝑛 = 30, 𝑥 + 𝑛 = 55 𝑦𝑒𝑎𝑟𝑠.

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 R=?

X = 25 years X +n = 55 years

𝐷𝑥+𝑛
𝑁𝑆𝑃 = 𝑅 ×
𝐷𝑥
𝐷55
1000 = 𝑅 ×
𝐷25
2142402
1000 = 𝑅 ×
5165007
5165007
𝑅 = 1000 ×
2142402

𝑅 = 2410.8 pounds

Remember that
Calculation of the Premiums:
• Net Single Premiums (NSP):
only once at the date of purchasing the insurance contract
• Net Annual Premiums (NAP):
may be payable periodically throughout the whole duration of
contract (n) or they may be limited to specific period of year
called (the premium period)

Contracts payable only on survival:

I. Pure Endowment contracts
II. Life Annuities (Single life)
a. Whole life annuity
b. Temporary life annuity
c. Deferred whole life annuity
d. Deferred temporary life annuity

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 II. Life Annuities

Due: paid at the beginning of the interval.

Ordinary: paid at the end of the interval.

Annuity Due Ordinary

Whole 𝑁𝑥 𝑁𝑥+1
𝑅. 𝑎̈ 𝑥 = 𝑅 × 𝑅. 𝑎𝑥 = 𝑅 ×
life 𝐷𝑥 𝐷𝑥
Deferred
𝑁𝑥+𝑚 𝑁𝑥+𝑚+1
Whole 𝑅. 𝑚/𝑎̈ 𝑥 = 𝑅 × 𝑅. 𝑚/𝑎𝑥 = 𝑅 ×
𝐷𝑥 𝐷𝑥
life
𝑁𝑥 − 𝑁𝑥+𝑛 𝑁𝑥+1 − 𝑁𝑥+𝑛+1
Term 𝑅. 𝑎̈ 𝑥 : 𝑛 = 𝑅 × 𝑅. 𝑎𝑥 : 𝑛 = 𝑅 ×
𝐷𝑥 𝐷𝑥
Deferred 𝑁𝑥+𝑚 − 𝑁𝑥+𝑚+𝑛 𝑁𝑥+𝑚+1 − 𝑁𝑥+𝑚+𝑛+1
𝑅. 𝑚/𝑎̈ 𝑥 : 𝑛 = 𝑅 × 𝑅. 𝑚/𝑎𝑥 : 𝑛 = 𝑅 ×
Term 𝐷𝑥 𝐷𝑥

Notes:
The net single premium: 𝑎𝑥 = 1 + ä𝑥

1) A whole life annuity

Annuity Due Ordinary
𝑁𝑥 𝑁𝑥+1
whole life 𝑅. 𝑎̈ 𝑥 = 𝑅 × 𝑅. 𝑎𝑥 = 𝑅 ×
𝐷𝑥 𝐷𝑥

Example 3
Find the net single premium for a whole life annuity contract issued
to someone now aged (35) years, of amount = 1000 pounds. In case
of:
a) The Due whole life annuity. b) The Ordinary whole life annuity.

Solution
x = 35 years, R = 1000 pounds

a) The Due whole life annuity:

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 𝑁𝑥
𝑁𝑆𝑃 = 𝑅. 𝑎̈ 𝑥 = 𝑅 ×
𝐷𝑥

𝑁35
𝑅. 𝑎̈ 𝑥 = 1000 ×
𝐷35

93906145
𝑅. 𝑎̈ 𝑥 = 1000 ×
3949851

𝑅. 𝑎̈ 𝑥 = 23774.6 pounds

b) The Ordinary whole life annuity:

𝑁𝑥+1
𝑁𝑆𝑃 = 𝑅. 𝑎𝑥 = 𝑅 ×
𝐷𝑥

𝑁36
𝑅. 𝑎𝑥 = 1000 ×
𝐷35

89956294
𝑅. 𝑎𝑥 = 1000 ×
3949851

𝑅. 𝑎𝑥 = 22774.6 pounds

2) Deferred whole life annuity (period m):

Annuity Due Ordinary
Deferred 𝑁𝑥+𝑚 𝑁𝑥+𝑚+1
𝑅. 𝑚/𝑎̈ 𝑥 = 𝑅 × 𝑅. 𝑚/𝑎𝑥 = 𝑅 ×
whole life 𝐷𝑥 𝐷𝑥

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Example 4
A person of 25 years bought a deferred whole life annuity, deferred
period m=15 years, face amount R=10000 pounds. Find the net
single premium in case of:
a) The Due deferred whole life annuity.
b) The Ordinary deferred whole life annuity.

Solution:
x = 25 years, m = 15 years, R = 10000 pounds
a) The Due deferred whole life annuity:

𝑁𝑥+𝑚
𝑁𝑆𝑃 = 𝑅. 𝑚/𝑎̈ 𝑥 = 𝑅 ×
𝐷𝑥
𝑁40
𝑁𝑆𝑃 = 10000 ×
𝐷25
75194205
𝑁𝑆𝑃 = 10000 ×
5165007
𝑁𝑆𝑃 = 145584 pounds

b) The Ordinary deferred whole life annuity:

𝑁𝑥+𝑚+1
𝑁𝑆𝑃 = 𝑅. 𝑚/𝑎𝑥 = 𝑅 ×
𝐷𝑥
𝑁41
𝑁𝑆𝑃 = 10000 ×
𝐷25
71752440
𝑁𝑆𝑃 = 10000 ×
5165007
𝑁𝑆𝑃 = 138920.3 pounds

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 3) The Temporary (Term) life annuity
Annuity Due Ordinary
𝑅. 𝑎̈ 𝑥 : 𝑛 𝑅. 𝑎𝑥 : 𝑛
Temporary
𝑁𝑥 − 𝑁𝑥+𝑛 𝑁𝑥+1 − 𝑁𝑥+𝑛+1
(Term) =𝑅× =𝑅×
𝐷𝑥 𝐷𝑥

Example 5
Find the NSP for 25 years for life annuity of 2000 pounds each year
for a person aged 50 if:
a) The first payment due at age 50.
b) The first payment pays at the end of each year.

Solution:
x = 50 years, n = 25 years, R = 2000 pounds

a) The first payment due at age 50:

𝑁𝑥 − 𝑁𝑥+𝑛
𝑁𝑆𝑃 = 𝑅. 𝑎̈ 𝑥 : 𝑛 = 𝑅 ×
𝐷𝑥
𝑁50 − 𝑁75
𝑁𝑆𝑃 = 2000 ×
𝐷50
44904187 − 4743459
𝑁𝑆𝑃 = 2000 ×
2549324
𝑁𝑆𝑃 = 31507 pounds

b) The first payment pays at the end of each year:

𝑁𝑥+1 − 𝑁𝑥+𝑛+1
𝑁𝑆𝑃 = 𝑅. 𝑎𝑥 : 𝑛 = 𝑅 ×
𝐷𝑥
𝑁51 − 𝑁76
𝑁𝑆𝑃 = 2000 ×
𝐷50
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 42354863 − 4095346
𝑁𝑆𝑃 = 2000 ×
2549324
𝑁𝑆𝑃 = 30015.4 pounds

4) The Deferred Temporary life annuity

Annuity Due Ordinary
𝑅. 𝑚/𝑎𝑥 : 𝑛
𝑅. 𝑚/𝑎̈ 𝑥 : 𝑛
Deferred =𝑅
𝑁𝑥+𝑚 − 𝑁𝑥+𝑚+𝑛
Temporary = 𝑅 × 𝑁𝑥+𝑚+1 − 𝑁𝑥+𝑚+𝑛+1
𝐷𝑥 ×
𝐷𝑥

Example 6
Find NSP for 15 years for deferred life annuity of 2000 pounds each
year, the deferred period (m) = 5 years. for a person aged 50 at
contract date if:
a) The first payment due at age 55.
b) The first payment pays at the end of each year.

Solution:
x = 50 years, m = 5 years, n = 15 years, R = 2000 pounds

a) The first payment due at age 55:

𝑁𝑥+𝑚 − 𝑁𝑥+𝑚+𝑛
𝑁𝑆𝑃 = 𝑅. 𝑚/𝑎̈ 𝑥 : 𝑛 = 𝑅 ×
𝐷𝑥

𝑁55 − 𝑁70
𝑁𝑆𝑃 = 2000 ×
𝐷50

32978576 − 8999056
𝑁𝑆𝑃 = 2000 ×
2549324

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𝑁𝑆𝑃 = 18812.4 pounds

b) The first payment pays at the end of each year:

𝑁𝑥+𝑚+1 −𝑁𝑥+𝑚+𝑛+1
𝑁𝑆𝑃 = 𝑅. 𝑚/𝑎𝑥 : 𝑛 = 𝑅 ×
𝐷𝑥

𝑁56 − 𝑁71
𝑁𝑆𝑃 = 2000 ×
𝐷50

30836173 − 8006174
𝑁𝑆𝑃 = 2000 ×
2549324

𝑁𝑆𝑃 = 17910.6 pounds

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