The three main components used by an insurer to determine a life insurance premium are:

Why A is correct

Life insurance premiums are built from three core components: mortality, the expected cost of deaths based on the mortality table; expenses, the insurer's administrative, sales, and operating costs; and investment earnings, the interest the insurer expects to earn on reserves, which reduces the premium. These elements are combined into the net premium plus loading. Factors like age and gender influence the mortality component but are not the premium components themselves; morbidity is a health-insurance concept.

Why the other options are wrong

• B) Age, gender, and occupation are risk-classification factors that shape the mortality component, not the three premium-building blocks.
• C) Morbidity is the disability and health insurance pricing factor; commissions are part of expenses but not a co-equal premium component.
• D) Inflation and reserves are considerations within pricing but are not the standard trio of premium components.

Memory hook

Premium = mortality + expenses − investment interest. Death cost, running cost, and interest working for you.

Why A is correct

The net premium for life insurance is calculated from mortality, the expected cost of death claims based on the mortality table, and is then adjusted for expenses and offset by investment earnings. The gross premium reflects the insurer's cost of doing business, including commissions and administration, and assumes a certain rate of interest earned on reserves. These three elements, mortality, expenses, and investment earnings, together determine what the policyowner pays for life insurance coverage. Because mortality sets the base claim cost, the actuary builds the premium so the insurer can pay future claims and remain solvent, while investment assumptions reduce the amount the policyowner must pay.

Why the other options are wrong

• B) Morbidity is the risk measure used for health and disability insurance; life insurance pricing is built on mortality, not morbidity. Morbidity belongs to health and disability pricing, not to the life insurance premium calculation.
• C) Taxes and commissions are expense components within the expense load, not separate fundamental pricing elements alongside mortality and interest. Taxes and commissions are folded into the expense load rather than standing as separate pricing components.
• D) Inflation is not a direct pricing component of the life premium; the three drivers are mortality, expenses, and investment earnings. Inflation may affect claims over time but is not one of the three primary premium components.

Memory hook

Three wheels of the premium cart: deaths (mortality), costs (expenses), and interest earnings.

Why A is correct

The premium reflects three actuarial assumptions: mortality (the expected number of deaths per the mortality table), expenses (administrative, acquisition, and distribution costs), and interest (the insurer's expected investment earnings, which reduce the premium needed). The applicant's age, gender, and health affect the mortality charge, but the three structural components of the premium are mortality, expenses, and interest.

Why the other options are wrong

• B) Commissions and taxes are elements inside the expense component, not separate primary components.
• C) Age, gender, and health are risk-rating factors that influence mortality, not premium components themselves.
• D) Morbidity (sickness rates) and disability are A&H pricing concepts, not life insurance premium components.

Memory hook

Premium = death costs + running costs − investment growth. Mortality, expenses, interest — the three-legged stool.

Why A is correct

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.

Why the other options are wrong

• Age affects mortality, but income and education are not direct premium components; the pricing factors are mortality, expenses, and investment earnings. This answer describes a different situation from the one in the question and is therefore incorrect under the facts given here.
• Morbidity is used in disability and health pricing; dividends and taxes are not the core three factors used to calculate life premiums. This choice does not fit the arrangement described in the question, so it is clearly not the right option to choose.
• Underwriting, claims, and marketing are business activities, not the actuarial components used to calculate the premium rate. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.

Memory hook

A life premium is mortality plus expenses minus investment earnings.

Why A is correct

Life insurance premiums are built from three components: expected mortality costs based on the mortality table, the insurer's expenses for acquiring and administering policies, and investment earnings on the reserves that accumulate. Higher expected mortality raises the premium; higher expenses raise it; higher investment earnings lower it. Morbidity is the corresponding component for accident and health insurance, while age, occupation, and hobbies feed into risk classification but are not the three pricing components themselves.

Why the other options are wrong

• B) Morbidity is the A&H pricing analog, dividends are distributions to policyowners, and commissions are a component within expenses — this set is not the three life pricing factors.
• C) Age, occupation, and hobbies help classify the risk within a mortality expectation; they are not the three structural pricing components.
• D) Inflation, interest rates, and tax brackets influence economics generally, but the rate structure itself rests on mortality, expenses, and investment earnings.

Memory hook

Premium = deaths + overhead – investment earnings.