Life Insurances and Annuities

Abstract

In Chapter 1, when we discussed some aspects of financial mathematics, the cash flows we studied consisted of payments whose timing and size were fixed in advance. However, we have already pointed out that it is possible to make payments dependable on death or survival of a person. For example, a retired employee may receive a regular payment each month until his/her death. If we want to find out how much the employer had to pay into a pension fund in order to provide the employer with this life annuity, we cannot use the techniques of Chapter 1. Those methods can only be used if we know for sure how many payments will be made. However, here we have a situation where the exact number of payments cannot be foreseen. The valuation of a life annuity cannot be made without using the theory of mortality.