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Annuities as a benefit and a premium

+2 votes
asked Aug 2, 2016 in BUS 1003H - Introduction to Financial Risk by NLester (520 points)

A question in the course reader reads:

"Suppose that (50) pays premium of R100 p.a in advance for life.... Calculate the expected present value of these payments (whole life annuity)"

It confuses me because the question itself sounds that it's policyholder pays the premium to the insurer.... But from what I read for whole like annuity payment it is the insurer paying the policyholder a specific payment... 

1 Answer

+3 votes
answered Aug 2, 2016 by NLester (520 points)
selected Aug 15, 2016 by simon_rigby
Best answer
In this particular case, the policyholder is paying a premium for the whole of their life to the insurer. 

There are two things to consider here: 
1. To pay for a particular benefit - you pay a premium to the insurer for them offering you the "insurance" product. This can be in the form of a series of payments- so an annuity.
2. These insurance products can be all sorts of things - but one of them can be an annuity that the insurer gives you. 

So you see, both the premium and the benefit can be an annuity! It depends on what the question asked. An annuity is just a way of expressing a series of payments. Seeing as both the benefit and the premium can be a series of payments - both can be an annuity.