The Actuarial Basis: How Age and Health Determine Whole Life Premiums
The fixed, level premium for Whole Life insurance is not arbitrary. It is mathematically calculated by actuaries based on the principles of risk management, combining expected mortality, investment return, and expenses. Understanding this basis demystifies why Whole Life is more expensive initially than term insurance.
The Three Actuarial Factors
- Mortality (Risk): The primary factor is the risk of death. Premiums are lower for younger, healthier individuals (lower risk) and higher for older individuals (higher risk).
- Investment Returns: The premium calculation assumes a conservative rate of return that the insurer will earn on the cash value. This return helps offset the cost of insurance.
- Expenses: Includes administrative costs, taxes, and commissions.
The Level Premium Mechanism
Since the risk of death naturally increases with age, a fixed premium is achieved by **overcharging** for the risk in the early years. This overage builds the policy’s cash value, which then subsidizes the true, higher cost of insurance in the later years, keeping the out-of-pocket payment level and guaranteed for life.
Disclaimer: This content is for informational purposes only and is not financial or legal advice. The actuarial basis of premiums is standard, but the specific rates vary between insurance companies.