Continuous and Limited Premiums

It was found in the discussion of life annuities that the cost of a whole-life annuity based on the American Experience table provides for the payment of annuities in some cases as late as age 95, for according to the table there will be three of the assumed group alive at that age. Are we to assume therefore, since annual premiums are life annuities due, that they are invariably paid to age 95 if the insured lives to that age? Of course this is not the case. Annual premiums are never paid after the termination of a contract, whether it terminates by expiry or by maturity; and a large majority of insurance contracts are certain to be closed before the holder reaches age 95. The whole-life policy is the sole contract insuring against death which may continue until the insured is age 95. Term and endowment contracts usually do not extend beyond age 65 or 75 of the insured. Therefore the majority of annual premiums will be life annuities due, not for the whole of life but for a temporary period, the maximum length of which will be the maximum length of the insurance contract.

With respect to the period during which premiums are paid insurance policies are of two kinds: policies with continuous premiums payable throughout the life of the contract; and so-called limited-payment policies, where the premiums are limited to a term shorter than the maximum life of the contract. For instance, a whole-life policy with continuous premiums, technically known as an ordinary life policy, will require payment of premiums until the contract matures by death or until the insured reaches age 96, at which time the policy matures irrespective of death. A thirty-year endowment-insurance policy with continuous premiums will necessitate their payment for thirty years only or for a shorter time in case the contract matures by death in less than thirty years. But a policy such as the following is often sold for example, a twenty-payment life or a twenty-payment thirty-year endowment insurance. A twenty-payment life policy will mature and its face value be paid only upon death or at age 96 but premiums will continue for a maximum of twenty years and fewer than twenty will be paid in case of death within this limit. In the two illustrations here cited annual premiums will be life annuities due, not for the term of the insurance contract, but limited in each case to twenty years. It is possible, therefore, in view of these facts again to modify the definition given for the net annual premium. The new statement will be: The net annual level premium is a life annuity due for the premium-paying period which is equivalent to the net single premium on the particular policy.