What three factors are used to calculate life insurance premiums?

The calculation of life insurance premiums is fundamentally based on three essential factors: mortality, interest, and expenses.

Mortality refers to the risk of death within a specified period and is a central element in determining the likelihood that an insurer will have to payout a death benefit. Insurers use mortality tables to estimate how many policyholders are expected to die during a certain period, which directly impacts the premium pricing.

Interest plays a critical role as well, as it pertains to the return on investments made with the premiums collected. Insurers invest premium payments in various financial instruments, and the interest earned on these investments helps fund the policy payouts while also contributing to the overall company earnings.

Expenses include all the costs associated with administering the insurance policies. This includes operational expenses such as underwriting costs, commissions paid to agents, marketing, and claims processing. To maintain profitability, an insurer must factor these expenses into the premium calculation.

Understanding these three components is crucial, as they directly influence the rates charged for life insurance policies. This framework helps ensure that the premiums collected will be sufficient to cover the anticipated claims and operating expenses while allowing for a sustainable business model.