The Basic Principles of Life Insurance (Part VI)
Determining Life Insurance Premium
Mortality tables list different rates for men and women of different ages. The rate per $1,000 of benefit for women aged 35 is $1.65 in the 1980 Commissioners Standard Ordinary (CSO) table. The companies that issue policies to only the healthiest applicants will have rates significantly lower than those in the CSO tables. Even insurance companies issuing policies to applicants in average health usually offer rates lower than those listed in the CSO tables.
We will first examine how the premium for a yearly renewable term (YRT) insurance policy is calculated to demonstrate how the tables are used.
YRT is the simplest form of insurance offered by life insurance companies. It provides insurance for a period of one year and allows the policyowner to renew the policy for successive periods of one year each, paying just the mortality charges and administrative expenses for one year at a time, and no more. The interest component is minimal.
The mortality charge for YRT insurance is determined by the death rate for the attained age of the individual involved. Each premium purchases only one year of insurance protection. Each group of policy owners of a given age is considered to be a separate class for premium purposes; each group must pay its own death claims, the burden shared equally by the members of the group. Because the death rate increases with age, the premium for yearly renewable term insurance normally increases each year.