AS A BUSINESS OWNER, WHAT CONCERNS YOU MOST  |  AS A BUSINESS OWNER, WHAT CONCERNS YOU MOST  |  FREE, NO OBLIGATION LIFE QUOTE  |  HOW MUCH LIFE INSURANCE SHOULD YOU OWN?  |  LIFE INSURANSE COVERAGE  |  LIFE INSURANCE GLOSSARY  |  LIFE INSURANCE vs OTHER INVESTMENTS


PREMIUM FOR A PROMISE


        When a person applies for life insurance they receive a policy, with is a written promise by the insurance company to pay the benefits outlined in it. In order to keep that promise , the coverage must be priced to ensure the benefit can be paid when the loss occurs. Understanding the basics of pricing life insurance helps to understand the products and the process of approving applicants for coverage.

        Four factors are used to calculate life insurance premium; mortality rate, investment income, expenses and profit. The mortality rate is the rate at which the people whose lives are insured are expected to die. While no one can predict when a particular person will die, mortality statistics collected by insurance companies can provide generally accurate information about what will occur with a group of people. This information is compiled into mortality tables used to predict the experience of a group of people with a similar profile (i.e. age, sex, and health status). The portion of the premium which reflects mortality is the risk charge.

        The most important factor for calculating the risk charge is age, because as a group of people grow older their chances of dying increase. But there are a number of factors that can affect how long an individual will live, including health, occupation and lifestyle.

        Investment income can help reduce what a company must charge for premiums. While premiums are the primary source of money used to pay death benefits, not all of the premiums received are needed right away. While this amount must be set aside in the form of reserves for when it is needed, these premiums can be invested to provide an additional source of money to pay benefits. To ensure that the premiums will be there when needed, only the most secure investments may be used for this purpose.

        Expenses increase the cost of insurance, and payment of promised benefits are one of the major expenses. Insurance companies must also collect enough money to pay for the cost of operating the company, including salaries, Agent commissions, office space, premium and income taxes, computer systems, etc. The cost of these items must be added to the cost of insurance.

        Of course any company must make a profit to stay in business, and this too is built into the cost of insurance. Profits make the company viable so they will be in business to pay future claims as promised.

        The relationship of above factors are very important in an insurance company’s operation to ensure their financial stability and ability to pay future claims. The very nature of insurance is founded on the public’s trust that the insurance company will be there to pay benefits when due, so it is the responsibility of the company to balance these elements with care. When viewed by the public or insurance industry analysts, these factors become the "yardstick" for measuring financial stability among all insurers.


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