Life Insurance Basics
Life Insurance Basics: Life Insurance
Pricing and Policy Mechanics
The pricing of life insurance policies is complex and dynamic. There are four factors that primarily drive pricing and policy performance: mortality, investment earnings, expenses and taxes, and persistence. The impact of the varying pricing factors on policy performance will vary in importance depending on the type of policy design.
Each pricing factor is based on current experience, usually from the insurer itself but sometimes complemented by data from actuarial consulting firms, public sources, or reinsurers.
Life Insurance Pricing Factors
A policy charge intended to cover the death claims paid by the insurance company. Mortality charges are primarily based on insurance company recent historical mortality experience. For Universal Life, the mortality charge is transparent (i.e., unbundled) and defined as the cost of insurance (COI) charge.
For Whole Life, the mortality charge is not explicitly revealed but is included in the guaranteed values and dividends (i.e., bundled). Specifically, for Universal Life, the COI charge is a function of a COI rate multiplied by the net amount at risk (NAR).
The COI rate is equal to the probability of death and loaded for deviation contingencies, pro t, and potentially to cover other insurer expenses. The NAR equals the total death benefit less the cash value. Consequently, mortality charges will be higher for lower premium funding due to the lower resulting account values (and higher NAR) and vice versa.
See illustrated NAR example below: