Net Premium
The premium calculated from mortality and interest only, excluding expenses - the pure cost of benefits.
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Practice This Concept
Which three factors are used to calculate life insurance premium rates?
Mortality, expenses, and investment earnings — Life insurance premiums are calculated from three components: mortality, which is the cost of death claims based on mortality tables; expenses, which are the insurer's costs of operations, commissions, and administration; and investment earnings, which are the interest the insurer earns on reserves and cash values and which offsets the other costs. The mortality charge increases with age, expenses include acquisition and ongoing costs, and the investment return reduces the net premium the insured must pay. This three-factor structure is fundamental to life insurance pricing.
National insurance concept
The gross premium charged for a life insurance policy is designed to cover:
Mortality costs and expenses, with expected investment earnings offsetting part of the cost — The gross premium is built from the mortality charge, the expense loading for acquisition, administration, and commissions, and an assumed rate of investment return that reduces the amount needed from the insured. The net premium is the amount needed for mortality after crediting the assumed investment earnings; adding expenses and a margin produces the gross premium. A higher assumed investment return lowers the premium, while higher expenses raise it. The pricing process must also account for expected mortality improvement and a profit margin. Understanding these components explains why different products carry different premiums.
National insurance concept
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