Chapter 18 rules

Hi Molly,

This looks correct. For 2), your first line is based on death benefits being paid at the end of the year of death (as you mention), and it also assumes that the bonus is awarded at the end of each year. So if death occurs in the first year say, no bonuses would have been awarded and hence the benefit would just be SA, whereas if death occurred in the 2nd year, 1 bonus would have been awarded. This is often the case for products in exam questions, but it is also possible that you might see alternatives. For example, bonuses could be awarded at the beginning of the year instead, and so the calculation would need tweaking.

Thanks,
Richie

 

Hi Molly,

If the bonus was paid at the start of each year, rather than end, then each potential death benefit would be increased by (1+compound%)... so you could multiply your whole EPV by (1+compound%).
This should give you an EPV of the death benefit of SA*A^1_x:n
(please note, your 2) posted in your second message should say (1/(1+compound%)) rather than (1/(1-compound%)))

The survival benefit would be unchanged - regardless of when the bonus is paid/applied the survival benefit will include n bonuses i.e. EPV = SA*v^n*probability survival to n @ interest =(1+i)/(1+b)-1

Whilst it's good to cover all avenues, do bear in mind that examiners will often ask non-standard questions to test your ability to apply your knowledge. It's therefore good to be able to derive these sorts of EPVs to reflect the specifics of a particular exam question - I find drawing a timeline with the timing, amounts and probabilities of future payouts helps.

Thanks,
Michael