The premium rate for a life insurance policy is based on three factors: mortality, interest, and expense.
Mortality – Life insurance is based on the sharing of the risk of death by a large group of people. The amount at risk must be known in order to predict the cost to each member of the group. Mortality tables are used to give the company a basic estimate of how much money it will need in order to pay for death claims each year. By using a mortality table, a life insurer can determine the average life expectancy for each age group.
Interest – Companies invest your premiums in bonds, stocks, mortgages, real estate, etc. They assume that they will earn a certain rate of interest on these invested funds.
Expense – Companies estimate expenses such as salaries, agents’ compensation, rent, legal fees, and postage. The amount charged in order to cover each policy’s share of expenses of operation is called the expense loading. This is a cost area that can vary from company to company based on its operations and efficiency.