Get complete information on Calculation of Level Premiums



The single premium of a given policy can be easily converted into level premium by establishing ratio between net level premium and net single premium. The ratio will differ according to the age at the beginning, nature and duration of the policy.

This calculation of the ratio is illustrated in the following table. The single premium in 5 years Term policy is to be converted into level premium on annual basis for 5 years.

Assuming that the net level premium for the policy is Rs. 1.0 per thousand of sum assured, the calculation of the present value of the entire level premium is given as below.

Annuity Due Principle :

The second method of calculating the net level premium is on the basis of annuity due principle because the annuity due for the same period and issued at the same age is just like level premium.

In the life insurance for the same period and issued at the same age is just like level premium. In both the cases, the payments are made in the beginning of the period and so long as the assured is alive.

It may be limited to a particular period also like term and endowment policies. For purchasing life insurance single premium is given and for purchasing annuity due purchase price of the annuity due is given.

In exchange if the purchase price of the annuity due, periodical annuity is paid constantly up to the life or up to the fixed period as the case may be similarly in exchange of the single premium, the issued is not required to pay the level premium.

Since net purchase price of annuity due issued at the particular age for a particular period or up to life is equal to the net single premium of the life insurance issued at the same age for the same period. Therefore, if the payment of periodical annuity due is known, the level premium for the same period can be easily known.

If the purchase price of Annuity due of Re. 1.0 and net single premium are known, the net level premium can be easily converted into net level premium.