Insurance Premiums

Question 1

What is the Mortality factor?

The mortality factor reflects the insured’s risk of _________ .

At its base, the mortality factor is drawn from mortality statistics compiled by the National Association of Insurance Commissioners (NAIC) into a set of rates called the ___________________\_(CSO) table.

Life insurance companies today use the 2001 CSO rates concluding at age _____ . (The 1980 CSO rates ended at age ____ )

Answer 1

The mortality factor reflects the insured’s risk of death.

At its base, the mortality factor is drawn from mortality statistics compiled by the National Association of Insurance Commissioners (NAIC) into a set of rates called the Commissioners Standard Ordinary (CSO) table.

Life insurance companies today use the 2001 CSO rates concluding at age 120. (The 1980 CSO rates ended at age 100.)

Question 2

How does Interest impact the premium amount?

Answer 2

The interest that insurers earn on their general account investments is an important factor in determining the premium rates it charges policyowners.

The interest factor works as a credit; the higher the assumed rate, the lower the premium.

Question 3

An Expense Factor is also called a …

What 3 objectives help determine the operational costs of an insurer?

Answer 3

An expense factor (sometimes called a load factor) is worked into the premium calculation.

The load factor reflects the costs (other than mortality) that the insurer expects to incur on the policy.

These operational costs include the insurer’s expenses for rent, salaries, benefits, commissions, and field expenses. In determining its load factors, insurers are generally guided by three objectives:

• cover total operating costs
• provide a safety margin
• contribute to profits or surplus

Premium Tax

A premium tax is a tax levied on insurance companies when they receive premiums. It is imposed by only a few states.

Question 4

Net vs. Gross Premium

Answer 4

The process of determining the premium that is actually charged involves several steps by the insurer’s actuaries:

1. Calculate net single premium, using the factors of mortality and interest. This is the theoretical amount, excluding the load factor, which would be needed to fund the face amount for the duration of the policy with a single premium payment.
2. Calculate the net level premium by applying a factor to the net single premium that essentially spreads out the premium for the duration of the premium-paying period.
3. Calculate the gross premium that is actually charged for the policy by adding the expense load to the net single premium or net level premium.

Applicants who are purchasing a single premium life insurance policy will pay a gross single premium, while those who will spread premiums out over a number of years will pay a gross level premium (also called a gross annual premium).

Question 5

What are the 4 premium payment modes?

Answer 5

• monthly
• quarterly
• semiannually
• annually

Question 6

Which insurance programs use Level vs. Flexible Premium Payment plans?

Answer 6

Under a level premium payment plan, the premium is fixed and remains level over the policy’s term.

Policies that use the level premium method include whole life insurance and variable life insurance.

Under a flexible premium payment plan, the policyowner can change the premium payment amount or frequency of payment. The policyowner can also choose to stop payments for a while and then restart them.

Policies that use the flexible premium method include universal life insurance and variable universal life insurance.

Question 7

Question 8