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Premium, Loading, Reserves. Oh my!

Premium, Loading, Reserves - Miss PiggyMIE – nope, this isn’t what Miss Piggy is famous for saying. Rather, it’s an acronym for the three factors considered in figuring rates for an individual life policy. “M” is for Mortality. “I” is for Interest Rates. “E” is for Expenses.

Mortality are the death claims the company expects to pay. This uses a table issued by the Commissioner to determine mortality statistics over the years by age, sex and occupation. And wouldn’t you know, in spite of the cost of living, it’s still popular – Kathleen Norris.  Race, nationality, or ethnicity would not be considered when figuring these rates. It’s typically used for loss expectancy in life insurance and used in figuring life claims. Mortality has the greatest effect on the premium.

Interest Rates are the money the company plans to earn on the annual premium payments. Finally, Expenses – Loading, are the cost of doing business (ex. Commissions, overhead, and basically claims that wouldn’t be considered in mortality).

The premium rates charged by insurance companies are calculated assuming an annual premium is paid. The interest that’s earned on its investments would help in lowering the premium. Your first premium is going to be due on the day the policy is issued, and is usually paid to the agent at the time of the application.

To make sure this is clear:

Gross Premium = mortality rates, assumed interest and policy’s share of the company’s operating expenses.

Net Premium = the portion of the premium that is based only on mortality tables and assumed interest. Doesn’t include the expenses or loading.

Wouldn’t it be great if there was a formula that was used to help determine how much life insurance a person would need to purchase? As Miss Piggy might say, math moi must admit, is not moi’s cup of java. But luckily there is a simple way to determine this. I’ll explore this in the next post.

Ready to find out which company and plan is right for you? Check out our Life Insurance page for a list of recommended providers.

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