Premium Determination for Life Insurance

Question 1

Factors in Premium Determination for Life Insurance

Answer 1

Mortality
Interest
Expense

Question 2

Net Premium formula

Answer 2

Takes into account interest and mortality factors only.
Mortality - Interest = Net Premium

Question 3

Gross Premium

Answer 3

Additional charges (expenses) are added to the net premium rate to enable an insurer to meet all costs under the contract.
Net Premium (Mortality - Interest)+ Expenses = Gross Premium

Question 4

Reclassifications

Answer 4

When reviewing an application, the underwriter may find it necessary to reclassify the risk. This could either increase or decrease the premium.

Question 5

Policy Reserves

Answer 5

The net premiums paid plus interest earned; the policy reserves must also reflect possible contract obligations. A reserve is an amount, representing actual or potential liabilities, kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.

Question 6

Premium Payment Mode

Answer 6

Mode reflects frequency of payment. Premium payments are made either monthly, quarterly, semiannually, or annually. Additional charges are included in modes other than annual to offset the lost interest earnings and increased administration costs. For this reason, the annual mode results in the lowest premium outlay. The more frequently the premiums are paid, the more expensive the mode of payment.