The three basic components that determine the premium for a life insurance policy are:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The life insurance premium is built from three pricing components: mortality (the cost of the death benefit based on the mortality table), expenses (the insurer's costs of operation, including acquisition and administration), and investment return (the interest the insurer expects to earn on premium reserves). The actuary combines these elements so that the premium, plus investment earnings, will be sufficient to pay claims and expenses while allowing for the insurer's margin. The other options describe ratings factors, distribution details, or operational functions rather than the three fundamental pricing components.
Why the other options are wrong
- B) Commissions and taxes are expense items within the pricing structure, and dividends are distributions to participating policyowners. They are not the three core pricing components.
- C) Age, gender, and occupation are underwriting risk-rating factors that affect which mortality rate is applied. They are not the three actuarial pricing components.
- D) Underwriting, claims, and reinsurance are insurer functions. They are not the actuarial building blocks that determine the premium.
Memory hook
Premium = mortality + expenses + investment earnings. The actuary's three-ingredient recipe for the rate.