Consider a $1 million Whole Life Insurance policy to be sold to individuals of a

Question

Consider a $1 million Whole Life Insurance policy to be sold to individuals of a given age x. We can consider two ways that the policyholder can pay for this: (a) by a Net Single Premium (NSP) or (b) by Net Periodic Premiums (NPP), the latter being paid by a life annuity. Both of these satisfy the Equivalence Principle- that the expected loss is zero. However, if we define risk to be the variance of the loss, then from the Insurance Company’s perspective, one of these has greater risk than the other. For each case, write down a random variable that represents the present value of the loss, and calculate its variance. Which has greater risk? (Show this, mathematically.) Give an interpretation as to why that is so.

Explanation / Answer

the payment of premium is depends on the age factor of the person and the life expectancy and age conditons also

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