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Sample Question - Term assurances

Use the question spreadsheet to answer the following question. Use the mortality functions on the ‘Life Table’ tab where appropriate.

(i)           On a new tab, calculate the expected present value (EPV) of a 15-year level term assurance, paying 100,000 at the end of the year of death of a life currently aged exactly 47.

As part of your calculation, create three columns showing:

(1)  the amount of payment made in year  t

(2)  the amount by which that payment is discounted

(3)  the probability of the payment being made.

Basis:    AM92 Select

Interest: 2% pa effective

(ii)          Copy the spreadsheet from part (i) as required, and adapt it to calculate the EPV of each of the following term assurances (all with payments at the end of the year of death of a select life, currently aged 47 exact, within a term of 15 years), and using the same mortality and interest basis:

(a)          150,000 on death in the first year, decreasing by a level amount of 10,000 each year (so the benefit on death in the final year is 10,000)

(b)         first payment of 75,000, increasing by 3% pa compound

(c)         the amount on death is equal to the amount of capital outstanding at the start of the year of death, on a 15-year mortgage of 150,000 serviced by level annual repayments (made in arrear) at a mortgage interest rate of 4% pa effective.