Mortality and Money

Suppose you are going to start a life insurance company in which you will insure 1000 young people, who are 16 years old, for $1000 each for one year. If one of them dies, the beneficiaries will receive a $1000 death benefit. You will need to calculate the amount to collect from each person in order to pay death claims. This amount is referred to as the net single premium (NSP). The NSP is based on two basic stipulations:

1. premiums are collected at the beginning of the year, and
2. death benefits are paid at the end of the policy year.

The NSP is the amount collected from each of the 1000 people insured, which, together with interest earned on the premiums, is the amount needed to pay all death claims at the end of the year. You will need to consider the number of 16-year-olds who are likely to die and thus the total amount of claims you expect to pay on the average.