Which three key factors influence life insurance pricing?

Life insurance pricing is fundamentally influenced by three critical factors: mortality, interest, and expense.

Mortality refers to the statistical likelihood of death within a specific demographic group. Insurers use mortality tables to estimate how many policyholders will likely pass away within a certain time frame, helping them determine the premiums necessary to cover claims while remaining financially stable.

Interest pertains to the returns that insurers can earn on the premiums they receive before they have to pay out any claims. Insurance companies invest the premiums in various instruments, and they anticipate certain returns on these investments. The interest earned allows insurers to maintain lower premiums, as it contributes to the overall funds available for paying out claims.

Expense involves the costs associated with issuing and maintaining insurance policies, including administrative costs, marketing, and underwriting. To ensure profitability, insurers build these operational costs into the pricing of their life insurance products.

These three factors work together to create a balance that allows the insurance company to operate sustainably while providing coverage to policyholders. Understanding this framework is essential in the context of life insurance, as it drives the financial modeling behind policy pricing and helps predict long-term viability and profitability for the insurers.