The premium charged for a life insurance policy is primarily based on which three factors?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Life insurance pricing rests on three pillars: mortality, the expected death claims reflected in mortality tables; expenses, the insurer's cost of doing business including acquisition and administration; and investment earnings, which reduce the premium because the insurer earns interest on reserves. These three factors determine the gross premium, with investment income acting as an offset. Other listed items are either secondary cost components or are not rate-making factors at all. In practice, mortality is the largest of the three components, while investment earnings offset a meaningful portion of the expense loading.
Why the other options are wrong
- B) Inflation and taxes are environmental costs, not the core pricing trio, and dividends are paid out to participating policyowners rather than priced in. The gross premium is built from these three components and then adjusted for the reserve structure.
- C) Age and gender affect mortality, but marital status is not a pricing factor, and expenses and investment income are also required to set the premium. Those items are not the pricing factors, and dividends are a distribution of surplus rather than a cost input.
- D) Claims, commissions, and advertising are components of mortality and expense, not the three fundamental pricing factors. Marital status is not a pricing factor, and the full premium also depends on expenses and investment earnings.
Memory hook
Price equals deaths plus overhead minus what the reserves earn: mortality, expenses, investment. The pricing triple.