Better CE Practice Test

What is the pure premium in life insurance pricing?

Pure premium equals the probability-based cost. The premium includes loading to cover expenses and risk. Pure premium is the base actuarial cost to cover only the expected mortality (probability of death) without loading. Premiums can be chosen by the policyholder.

Correct Answer:

Pure premium is the base actuarial cost to cover only the expected mortality (probability of death) without loading.

Explanation:

The idea behind the pure premium is to fund only the likelihood-weighted cost of the death benefit. It’s the base amount needed to cover the expected mortality costs, computed from mortality probabilities and the benefit amount (often using present-value calculations to reflect time value). It does not include any extra charges for expenses, commissions, risk, or profit. That is why the pure premium is described as the base actuarial cost to cover only the expected mortality—no loading. The full premium charged to a policyholder includes those additional loadings, which is why it’s larger than the pure premium. And pricing isn’t something the policyholder simply chooses; actuarial pricing determines the premium by building in expenses, risk loads, and profit.

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