SOA Exam ALTAM Sample Question 52
Study guide: Exam ALTAM
For universal life insurance policies with a death benefit of 100,000 plus the account value issued to independent lives age 50, you are given:
(i)
| Policy Year | Annual Premium | Percent of Premium Charge | Annual Cost of Insurance Rate per 1000 | Annual Expense Charge | Surrender Charge |
|---|---|---|---|---|---|
| 1 | 2500 | 5% | 5.00 | 30 | 0.8 * AV_1 |
(ii) The credited interest rate is i = 0.06.
Part a (2 points)
Show that the cash value at the end of policy year 1 is 400 to the nearest 10. You should calculate the value to the nearest 1.
Part b (3 points)
You are also given the following information for profit-testing these policies:
- (i) The expenses for each policy are:
- Pre-contract expenses of 200
- Annual maintenance expenses of 120 at the beginning of each year including the first year
- Surrender benefit expenses of 100
- Death benefit expenses of 200
- (ii)
q_{50} = 0.004 - (iii) Death benefits are payable at the end of the year of death.
- (iv) At the end of the first year, 10% of the policyholders in force are expected to surrender.
- (v) The earned rate is 11%.
- (vi) The hurdle rate is 14%.
Show that the expected profit emerging at the end of year 1 is 400 to the nearest 10. You should calculate the value to the nearest 1.
Part c (1 point)
Calculate NPV(1), the actuarial present value of expected profits through year 1.
Part d (3 points)
You have calculated that the Net Present Value (NPV) for the policy is 2000. Your supervisor suggests that the 10% surrender assumption is too low. He recommends assuming 20% of the policies in force surrender at the end of year 1.
Calculate the revised NPV using the new surrender assumption.
(This is Question 6 from the Spring 2015 Written Answer exam.)
Answer this question and see the worked solution