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Chapter 27

Levelling the Net Single Premium


Review the assumptions used in calculating the net

single premium.
Describe the meaning of present value of future
Explain the mathematics involved in leveling the net
single premium for life insurance.
What is the reason behind Leveling the premium?

It is not affordable for most people to pay one premium

at the inception of the contract.
Example: paying a lump sum $20,918 to purchase
$100,000 of whole life insurance.

Instead of paying one large amount, people may prefer

purchasing life insurance by paying equal periodic
instalments-level premium.
Using the level-premium method, the insured is overpaid( overinsured) the is
early years of the contract an underpaid(underinsured) in the late years of the
Level premium- A solution to dual problem

First problem: Affordability of premium payments as a result of increasing age

and the need for owning the life insurance if he/she is in the good heath
Second problem: Adverse selection problem which cause the less healthy
people stay in the pool while the more healthy people will select themselves
NSP Assumptions: Revisited
In order to have the net single premium equal the present
value of the future benefits , the following assumptions are

Assump.1: NSP premium is paid in full at the beginning of the

contract term.
Assump.2: All death claims are paid at the end of policy year.
Assump.3: The actual mortality rate(Probability of dying is
calculated by using the CSO1980 table)
Assump.4:Net single premium is the amount that is paid only
for mortality costs; no additional amounts are included for
operating expenses additions to surplus , or taxes.
Do life insurance companies operate within these
restrictive assumptions?

Life insurance companies pay claims and receive premiums

throughout the calendar year.

Also , they dont adhere exclusively to the 1980 CSO Mortality

Table and various mortality tables are uses to calculate rates.
Leveling Term Life Insurance Contract
Paying one time premium is not affordable for many people and
they seek to pay the premiums in equal annual instalments.
In order to find the level premium payment we use the
following formula:

NLP= NSP /PVTLAD (formula 3)


NLP = net level premium

NSP = net single premium
PVTLAD= present value temporary life annuity due factor (must be
Example: Calculating the net level premium(NLP) for Mr. Worth.
He wants to buy a 5-year term life insurance at age 30, $1000 face
amount, 4 percent interest rate.

First step : calculate the NSP for a 5-yeat tem life insurance
( previous chapter, slide 58, Table 4)
Second step: Calculate Present Value Temporary Life Annuity Due (PVTLAD)

NOTE: For leveling the term life insurance we must calculate PVTLAD(it is called
temporary because the number is not calculated for the whole life of the
Third step : calculate NLP using the formula


NLP= 8.183/ 4.615 = 1.774
Leveling the Whole Life Insurance

Leveling the premium for the whole life insurance is similar to

leveling the premium for the term policy.
The main difference between leveling the whole life insurance
is using Life Annuity Due (LAD) instead of Present Value
Temporary Life Annuity Due( PVTLAD).
Suppose we want to calculate the level premium for whole life
insurance for Mr Worth at age 30 with 4 percent interest rate.
-Because it is a whole life insurance you should find LAD for 70
First Step: Calculation of NSP for a whole life insurance
(Chapter(previous chapter, slide 61, table 5)

Second step: The sum of the 70 calculations starting at age 30 and ending at age 99 provides the LAD required for leveling the whole life contract.

LAD= 20.563
Third Step:

NLP=$209.185/20.563 =$10.172
Leveling the Endowment Life Insurance
For leveling premium for endowment life insurance first you
have to calculate the NSP for endowment life insurance.
TLAD that is used to level the term life insurance is the same
TLAD required to level the endowment life insurance.
Example: Calculate the level premium for 5-year endowment
life insurance for MR Worth(age30,4%interest rate).

NSP= death benefit+ survivor benefit=$8.183+

$822.53=$814.35 (Table 6 & Table 7 chapter26)
First Step: NSP calculation (Table6 & 7, Slide 63, Chapter26)

NSP to pay death benefit 8.183

Year Age Probability of surviving Benefit PVF Yearly NSP
5 35 9,491,711/9579,998 1000 0.822 814.352
Plus: NSP death benefit 8.183
NSP for five year
endowment 822.535

NSP= death benefit+ survivor benefit=$8.183+$814.352=$822.535

Second step: calculate the LAD

TLAD= 4.615 (Table2, slide 11 )

Third Step:

NLP= NSP/LAD= $822.535/4.615=$178.23