Suppose we want to create a simple Life Insurance pricing model, as presented in Actuarial Mathematics.
Given a set of assumptions, we wish to find the expected value of Life Insurance benefits, discounted to present value.
Suppose then we have the following assumptions:
Life Insurance Policy A: Pays a flat benefit amount of $50,000 in case of death (up to age 65)
Life Insurance Policy B: Pays X% of yearly salary in case of death (up to age 65)
Salary @ age 27: $100,000
Benefit Flat Amount: $50,000
Benefit as % of Salary = X%
Probability of dying within one year = (pulled from mortality table https://www.ssa.gov/oact/STATS/table4c6.html )
Risk-free Interest Rate: 5%
Total Premium = sum of expected benefits, discounted to 2022
Our task is to objectively compare Policy A and Policy B as well as understand their relative pricing structures. In addition, suppose we want to keep the total premium for Policy B at $1000.
Intuitively, we can build a dynamic spreadsheet and goalseek the total premium by changing benefit amounts (or percentage of salary).