Life Insurance Products and Pricing
Life Insurance Products and Pricing
The Life Insurance Products and Pricing domain tests how life products are structured and how premiums and reserves are set. You must know the product families, the pricing building blocks, and how assumptions interact.
Core rules and concepts
- Product families: term assurance (pure death cover, no maturity value); whole life (cover for the whole of life, with or without premium cessation); endowment (death or survival benefit at maturity); money-back (periodic survival benefits reducing the sum assured); ULIP (investment risk borne by the policyholder, with explicit charges); annuities (immediate or deferred, life or period certain).
- Pricing identity: expected present value of premiums = expected present value of benefits + expenses + profit margin. Net premium covers benefits only; gross premium adds expense, contingency and profit loadings.
- Assumptions: mortality table (e.g., a standard table or insurer experience), valuation interest rate, expense inflation, lapse and surrender rates, and tax.
- Reserves: net premium reserves, gross premium reserves, and modified reserves (e.g., Zillmer) to avoid initial strain.
Worked example
A one-year term policy pays a sum assured of 1,000,000 on death. Mortality q = 0.002, valuation interest is 5%, expenses are 10% of gross premium, and there is no profit margin. Expected claim = 1,000,000 × 0.002 = 2,000. Discounted expected claim = 2,000 / 1.05 = 1,904.76. If gross premium P satisfies P = 1,904.76 + 0.10P, then 0.90P = 1,904.76, giving P = 2,116.40. The net premium is 1,904.76 and the expense loading is 211.64. The reasoning matters: claims are discounted and expenses are loaded on the gross premium, not added to the net premium.
Traps
- Using undiscounted expected claims.
- Mixing net and gross premium bases.
- Forgetting that ULIP investment risk sits with the policyholder, while any guarantee is an insurer cost.
- Confusing sum assured with premium or with fund value.
- Ignoring lapse, surrender and expense-inflation assumptions.
Key points
- Net premium covers benefits only; gross premium adds expenses and margins.
- Discount every expected cash flow at the valuation rate.
- Product design determines where investment and mortality risk sit.
- Reserves depend on the valuation basis, not the pricing basis alone.
- ULIP charges and guarantees must be modelled explicitly.