This worksheet has been designed and tested using Netscape 3.0. It should work with later versions of Netscape's browsers but will not work with other browsers. It uses only JavaScript for computations and should cause no problems when used with the appropriate browsers. The operative word here is "should" -- the author cannot guarantee fault-free operation.
You should be able to use the worksheet when not connected to the internet. Save the program file (ws_***.htm) and the accompanying instruction file (wi_***.htm) on your disk using the browser's command to File Save. At a later time you may retrieve the file using the browser's File Open file command; you may then use the page as you would if you were on the network. Note, however, that the file saved will have all the initial settings rather than those you have changed.
When using the worksheet, you may change any inputs. To do so, click inside the appropriate box, then make your changes or select the desired radio buton. When finished, click any area outside the boxes on the form.
This worksheet is designed to find the present value of a fixed annuity. It is not suitable for valuing an annuity involving payments that vary with investment performance.
All inputs are contained in the table. The worksheet may be used for a joint annuity covering a worker and a beneficiary, or for a single annuity covering only a worker. In either case, data must be provided for a worker. For joint policies information must also be provided for the beneficiary. If a single annuity is chosen, any beneficiary information will be ignored.
The key terms of the annuity are provided in an Amount paid block. Only the one applicable for the chosen type of policy (single or joint) will be used. Amounts entered may be nominal or real. They may be actual amounts (for example, 10,000) or relative (for example, 1.0 if both are alive and 0.5 if only one is alive). To aid readability, commas may be included in numbers entered in these boxes (they will be removed when the entry is processed).
The values for the amounts paid values are used for the first year in which payments are made. In each subsequent year these amounts are increased by the percentage specified in the box for Growth rate in amount paid (for example, enter 3.50 for 3.50% per year). If a constant annuity is desired, enter zero in this box. If the annuity is to begin immediately, enter zero in the Years deferred box. For a deferred annuity, enter the number of years before the first payment is to be made.
Two sets of mortality tables, taken from the Life Insurance Fact Book, are provided. The first is the Commissioners 1980 Standard Ordinary (1970-1975) table, designed for estimating mortality for those who apply for individual life insurance policies. The second is the 1983 Individual Annuity Table (1971-1976, projected to 1983), designed for estimating mortality for those who apply for individual annuity policies. According to the Fact Book:
"Mortality rates contained in the 1980 Commissioners Standard Ordinary Table were obtained from experience of 1970-1985, but contain an added element designed to generate life insurance reserves of a conservative nature in keeping with the long-term guarantees inherent in life insurance contracts.... Mortality rates for the 1983 Individual Annuity Tables are, again, conservative as related to the actual and projected experience on which they are based."
Five mortality assumption choices are provided. Either of the two tables can be used. Alternatively, a combination of the two can be selected. In the latter case, the death rate per 1,000 individuals of any given age and sex is computed by taking a weighted average of the corresponding figures from the two tables. For a typical individual, a 0.50/0.50 combination of the two tables may be the most appropriate choice. For a joint annuity, a selection must be made for both the worker and the beneficiary. For a single annuity, the latter information is ignored.
The final input concerns the Annuity discount rate. This should be stated as an annual percentage rate (for example, 6.00 for 6.00% per year). All expected cash flows are discounted to the current date at this rate. If payments are nominal amounts an appropriate nominal rate of interest should be utilized. On the other hand, if the payments are real (that is, of constant purchasing power), a real rate of interest should be employed.
The worksheet computes the expected amount paid in each year, then discounts these amounts back to the present, using the assumed discount rate. The death rate for each age is taken as the probability that an individual of that age will die within the next 12 months (and hence live for 0.50 years). Expected values are based on the probabilities of the possible states of the world each year, along with the associated payments. State probabilities take into account the transition probabilities from each possible state to each of the other possible states, using the probabilities of death for the worker and (where applicable), the beneficiary.
When you wish to find the present value of the annuity described in the table, click the PROCESS button. The present value will appear in the box to the right of the button. The amount is stated in units of currency as of the current date (that is, the date at which the worker's age is that shown in the upper left-hand box in the table).