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Determining the Cost of Life Insurance


Life insurance premiums are dependent on three variables:

1. Mortality
2. Interest
3. Expenses

Let’s consider each variable in turn.

Mortality: the concept of life insurance is based upon a large number of individuals sharing the cost of the risk of death. The cost to each group member is calculated by understanding the amount of risk. Insurance companies use mortality tables in order to provide a general estimation of how much they will need to pay each year for death claims. The mortality table allows a life insurer to determine life expectancy, on average, for each different age group.

Interest: interest earnings are also used to calculate life insurance premiums. Life insurance companies invest all insurance premiums into stocks, bonds, mortgages, real estate, etc. The assumption is of course that they will earn a certain amount of interest upon those investments.

Expenses: the third variable is determined by the insurance company’s costs. This will include operating costs, paying for claims, and investing the premiums. This in turn equates to employee salaries, compensation to agents, legal fees involved in the processes, office rental, postage fees, and more besides. Each policy’s operational costs are charged under the term of “expense loading”. The costs do vary depending on the life insurance company’s operational costs as well as efficiency.

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