The premium charged for life insurance must cover three principal components:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Life insurance rates are built from three factors: mortality, the expected death claims based on the mortality table; expenses, the administration, commissions, taxes, and other costs of running the business; and investment earnings, the interest the insurer earns on reserves, which reduces the premium needed. Understanding these components explains why higher investment earnings and lower mortality allow lower premiums. Dividends, if any, are distributions of surplus rather than a premium component, and morbidity applies to health and disability products rather than life insurance pricing.
Why the other options are wrong
- B) Those items are a subset of expenses, not the three principal components that drive life insurance pricing. The pricing framework is broader and includes mortality and interest. Those items are counted within the expense component.
- C) Morbidity applies to disability and health products, not to life insurance pricing, which uses mortality tables. Life pricing is driven by death rates, not sickness rates. Life pricing looks at death rates instead.
- D) Dividends are not a premium component; they are distributions to participating policyowners, and morbidity is not part of life pricing. The three components are mortality, expenses, and investment earnings.
Memory hook
Rate recipe: mortality + expenses − investment earnings = the premium.