The premium rate for a life insurance policy is built from which three components?
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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 components: mortality (the expected cost of death claims, drawn from mortality tables), expenses (acquisition, administration, and overhead), and investment earnings (interest the insurer expects to earn on premiums, which offsets cost). The insurer projects claims and expenses, discounts by the assumed investment return, and sets premiums accordingly. Age, gender, and smoking status are rating factors used within the mortality component to classify risk — they are not themselves the rate-building blocks. Premium tax, licensing, dividends, and reserves are operational items, not the three foundational components.
Why the other options are wrong
- B) Premium taxes and licensing fees are costs that fall within the expense component of pricing, not separate foundational components of the rate.
- C) Legal reserves are the result of pricing and premium flow, not one of the three building blocks that determine the rate.
- D) Age, gender, and smoking status are classification factors that feed into the mortality component. They are not themselves the three components of the rate.
Memory hook
Mortality + expenses − investment earnings = the premium price tag.