Chapter 6 - Premiums

Question 1

What is the purpose of premiums?

Answer 1

• an exchange for insurance protection
• portion of the policyowner’s “consideration”
• the “consideration” is the binding force in the contract/cements the agreement between the insurer and policyholder.

Question 2

what will happen if a grace period expires and premium has not been paid?

Answer 2

the policy will lapse

Question 3

What are the three factors in premium calculation?

Answer 3

• Mortality
• Interest
• Expenses

Question 4

What factor has the greatest effect on premium calculations?

Answer 4

Mortality Factor

Question 5

Mortality Factor

Answer 5

• has the greatest effect on premium calculations/rate-making due to the variability of the individual to be insured.
• determined from a “mortality table”
• originates form the “Commissioner’s Standard Ordinary Mortality Table’

Question 6

What is a mortality table?

Answer 6

• provides an indication of the probability of death of an individual at a particular age.
• provides the death rate (the average number of deaths that will occur each year in each age group).
• based upon a large cross-section of individuals and time.
• used to help predict the life expectancy and probability of death for a given group.

Question 7

What is the death rate?

Answer 7

• average number of deaths that will occur each year in each age group.
• the number of death in a group of people is usually expressed as death per thousand.

Question 8

Mortality Rate

Answer 8

• the frequency of deaths in a defined population at a specific time interval.
• higher mortality rate = higher premium

Question 9

Morbidity Rate

Answer 9

• the occurrence of diseases in defined population at a specific time interval.
• higher morbidity rate = higher premium

Question 10

Interest Factor

Answer 10

• Insurance companies invest the premiums they receive in an effort to earn interest.
• interest is one of the ways an insurance company can lower the premium rates.
• higher presumed rate of interest = lower premiums
• it is a reflection of an insurer’s return on their investments.

Question 11

Expense Factor

Answer 11

• “loading charge or loading factor”
• derived from operating expenses or funds the insurer pays out.
• death benefits paid, commissions/salaries to producers/employees, administrative costs.

Question 12

Reserve

Answer 12

• the minimum amount that each state says an insurance company must set aside to pay future claims.

Question 13

Surplus

Answer 13

• insurance company profits exceeding expenses
• will affect premium cost for customers

Question 14

How does age affect premium cost?

Answer 14

• the older the person, the higher the probability of death and disability.

Question 15

How does sex/gender affect premium cost?

Answer 15

• Women tend to live longer than men, so their premiums are usually lower.

Question 16

How does your current health affect premiums?

Answer 16

Poor health increases the probability of death and disability

Question 17

How does occupation affect premiums?

Answer 17

Hazardous jobs increase the risk of loss

Question 18

How do personal hobbies affect premiums?

Answer 18

High-risk hobbies increase the risk of loss

Question 19

Does being a smoker affect premiums?

Answer 19

• tobacco use presents a higher risk than nonsmokers

Question 20

Premium Mode

Answer 20

• policy feature that permits the policyowner to select the timing and frequency of premium payments.
• “Mode of Premium Provision”
• The higher the frequency of payments, the more the policy will cost the insured in total.

Question 21

Net (Single) Premium