What are the three primary factors used to determine premium costs in life insurance?

The three primary factors used to determine premium costs in life insurance—mortality, interest, and expenses—are essential components of the underwriting process.

Mortality refers to the risk of the insured individual passing away within the policy term and helps insurers estimate the potential payout for claims. Understanding mortality rates allows insurers to calculate a risk profile for their applicants, which significantly influences premium rates.

The interest component pertains to the investment income that insurers expect to earn on the premiums collected before claims are paid. Life insurance premiums are not just a pool of risk; they are also an accumulation of money that the insurer invests to generate income. This income helps offset the costs associated with death claims and operating expenses, ultimately affecting the premium amount.

Expenses encompass the operational costs that insurance companies incur, such as administrative expenses and commissions. These costs must be factored into the pricing of premiums to ensure that the insurer remains financially viable.

In combination, these three factors—mortality, interest, and expenses—provide a comprehensive framework for evaluating risks and setting premium prices that are both equitable for the insured and sustainable for the insurer.