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Income Tax Act 2007

Timing and quantifying rules - Terminating provisions - Expected death strain formulas

EZ 54: Expected death strain formulas

You could also call this:

“Formulas for calculating potential insurance payouts due to death”

You need to know about two formulas that help figure out the expected death strain. The first formula is for life insurance, and the second is for active annuities.

For life insurance, you multiply two things: the chance of a claim happening because the insured person dies that year, and the difference between the amount of money promised at the start of the year and the money set aside at the start of the year.

For active annuities, you multiply the chance of a claim happening because the insured person dies that year by the money set aside at the start of the year.

The chance of a claim happening is worked out at the start of the year. It uses the same guesses about how long people might live that are used to figure out how much money to set aside.

The amount of money promised is what would be paid if the insured person dies that year. If nothing would be paid for death, it’s the amount that would be paid if the person lives to a certain age or date in the policy. This amount is decided at the start of the year and might be zero.

The money set aside is the amount the insurance company has saved for the insured person under their policy at the start of the year.

There are some changes to these rules in other parts of the law. You can find these changes in sections EZ 55(2), EZ 56(2), EZ 57(2), EZ 57(3), and EZ 58(2).

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM3112411.

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EZ 53: How expected death strain is calculated, or

“Calculating the expected financial impact of policyholder deaths on life insurance”

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EZ 55: Expected death strain formulas: option when more than 1 life insured, or

“Calculating the average risk for multi-person life insurance policies”

Part E Timing and quantifying rules
Terminating provisions: Expected death strain formulas

EZ 54Expected death strain formulas

  1. The expected death strain formula (life) is—

    claim probability × (opening sum assured − opening actuarial reserves).

    Where:

    • The expected death strain formula (active annuities) is—

      claim probability × opening actuarial reserves.

      Where:

      • The items in the formulas are defined in subsections (4) to (6).

      • Claim probability is the probability of a claim arising under the policy for the life insured’s death in the income year. It is determined at the start of the income year using the same mortality assumptions as are used to calculate the life insurer’s actuarial reserves at the start of the income year. It is expressed as a decimal. Variations to claim probability are in sections EZ 55(2) and EZ 57(2).

      • Opening sum assured is the claim that would be payable under the policy for the life insured’s death in the income year or, if no such claim would be payable, the claim that would be payable under the policy for the life insured’s survival to the relevant date or age specified in the policy. It is determined at the start of the income year. It may be zero. Variations to opening sum assured are in sections EZ 56(2), EZ 57(3), and EZ 58(2).

      • Opening actuarial reserves is the amount in the life insurer’s actuarial reserves for the life insured under the policy. It is determined at the start of the income year.

      Notes
      • Section EZ 54: inserted, on , by section 199(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).