Life Insurance Premiums and Proceeds
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MR. WATSON: A brief talk about insurance pricing. Insurance is priced per thousand dollars of coverage.
MR. WATSON: A young man my age might pay $10 per thousand.
MR. WATSON: How about for this ole boy who is older than me? He might pay more like $20 per thousand. Right? Do you agree?
Primary Premium Factors
- Mortality - the expected incidence of death with-in a group
- Interest - the higher the interest rate assumption, the lower the premium & vice versa
- Xpense - the higher the expense to the insurance company, the higher the premium
MR. WATSON: "Mortality factor": The portion of the premium representing mortality reflects the pure cost of providing death protect. The "amount at risk". Of the three, the mortality factor has the greatest effect on premium calculations, commonly called "rate-making". In order for a mortality table to be accurate,
- it must be based on a large cross-section of people and
- a large cross-section of time. A mortality table tells us two things:
- How many people are going to die at any given age and
- The average life expectancy at any given age, how long are they going to live?
MR. WATSON: "Interest." Guys, the higher the interest rate assumption, what happens to the premium?
ALL: Goes down.
MR. WATSON: The lower the interest-rate assumption, what happens to the premium?
ALL: The higher it goes.
MR. WATSON: Next, "Expenses." Also called the "loading charge". Every policy has a loading charge added to the premium. It helps cover the cost of people dropping their policy in the first year. That is the most expensive time for the insurance company. The insurance company pays for the medical exams, attending physician reports, background checks, etc.
Other premium factors
- Age - if you are an older, you pay more.
- Sex - who pays more for life insurance? A man, or a woman? A man. Women live longer. But some companies now use unisex rates, no difference in price.
- Health -
- Occupation or avocation - occupation is your job, avocation are your hobbies.
- Habits
MR. WATSON: The insurance company will look at all of these factors. Then they determine whether an applicant is a
- preferred,
- standard, or
- substandard risk.
If you bring to the table a higher degree of risk than the company's standard underwriting guidelines, you will be "substandard" and the insurance company is going to adjust the premium to reflect this extra risk. This is called "rating". They will rate you.
MR. WATSON: Let's try this again. If you smoke, are over-weight, have high blood pressure, or maybe even have a dangerous job, you bring a degree of risk that's higher than the insurance company's guidelines for standard or preferred rates. The company will rate you possibly sub-standard. Does that make sense?
ALL: Yes.