In the question it has been given that the policy term is three years and reversionary bonuses are at 6% p.a. compound declared at year end. So the death benefit for third year end has bonus compounded for two years which is fine. But for the maturity benefit the bonus is given as (1.06 ^ 3), which according to me is absurd since bonus being declared at year end and policy maturing at third year end gives bonus for only two years similar to the death benefit given. I am really confused. Am I missing out something or is the solution faulty? Please Help. Thank You.
Hi, In this question, if suppose the policyholder survives for all 3 years then we would have the termination bonus as well as the reversionary bonus compounded for 3 years. 1. In summary, 20,000 benefit turns out to be either 22572 (with 2 years reversionary bonus (at the end of 1st year and at the end of second year) and he died during the third year so his estate gets the death benefit at the end of year of death. 2. Now if he survives till the end of 3 years, he will have 26302 (3 years reversionary bonus 6% pa compounded and terminal bonus 10%) . But you need to assign the probability for survival to be 0.9928 for case 2 and 0.00714 for case 1. Hop it clarifies your doubt.
