Question

You bought a whole life insurance policy. On December 1 of the year, you die the insurance will pay an amount of 1 (1,000,000€).

If you die on May 12, 2045, your family receives a payout from the insurance policy on December 31, 2045.

You buy the insurance at the beginning of the year (2020). The fair premium is π. Show how to find π.

Answer 1

The whole life insurance policy is bought on 1 January ,2020 (as given in the question)

Suppose I die on Deccember 1,2020 then I will get a premium of Euro 1,000,000.

This means that the premium receiveable in the event of such contingency = Euro 1,000,000

But if I die on May 12,2045 I will have to pay a premium every year till date of death= 25 years

Hence the fair premium is π = Premium to be Recieved/ No of years till death

= Euro 1,000,000/25 yrs = Euro 40,000/ year