How is life insurance cost determined?
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Asked July 21, 2010
For insurance companies, there are three primary factors that affect the cost of insurance. Mortality, Interest, and Expense statistics are used in equal measure to help insurance companies recognize trends and prevent taking large losses.
Mortality rates are the statistics of life and death in the region where the insured person lives. For insurance companies, these statistics are very important, as they indicate how long the company can expect to collect premiums before paying out the value of the policy. As the average person's life span increases, the cost of life insurance decreases, directly related to the ability of the company to collect more premiums before the insured passes away.
Interest earnings are important because they demonstrate how much money is being generated by the premiums collected. The interest rate is at the very heart of a successful life insurance policy, and affects how much money has to be collected from customers in order to generate the necessary pay outs. When interest rates are high, premium payments can be reduced, and vice versa.
The third major consideration from the insurance company point of view is the operational expenses of the company. On a life insurance policy, this is sometimes referred to as expense loading, and it determines all of the costs associated with maintaining the policy. Agent commissions, bookkeeping, legal fees, and utility costs associated with the business must all be taken into consideration.
With these three numbers in hand, insurance companies are then able to refine individual policy rates by analyzing the statistical risk of the person being insured. For obvious reasons, persons who come from long-lived blood lines can be given lower life insurance rates, while families that have a high incidence of hereditary illnesses may pay more, even if the insured does not currently have any symptoms of the illness.
Answered July 21, 2010 by Anonymous