Life insurance premiums are based on three primary components. Which set correctly lists them?
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Answer & full 3-part explanation (select an option above, or peek)
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.