What three factors does an insurer forecast to set premiums for Whole Life Insurance?

The selection of mortality, expenses, and investment return as the primary factors for setting premiums for Whole Life Insurance is grounded in the fundamental principles of insurance pricing. Each factor plays a critical role in determining the amount that an insurer must charge to ensure that it can cover its obligations and remain financially viable.

Mortality refers to the likelihood of policyholders passing away within a given period. Insurers use actuarial data to estimate future claims based on the death rates of a demographic group. Accurate mortality predictions are essential, as they directly influence the insurer's potential payout and thus the premiums needed to cover those payouts.

Expenses encompass the administrative costs associated with underwriting policies, as well as other operational costs necessary for managing the insurance business. This includes costs related to marketing, sales, commissions, and claims processing. Adequate premium pricing must consider these expenses to ensure the insurer can operate effectively.

Investment return reflects the income generated by the insurer's investment portfolio. Since whole life insurance policies often involve a cash value component, insurers invest premiums to yield returns over time. A higher expected investment return allows the insurer to charge lower premiums while still maintaining solvency and fulfilling its obligations to policyholders.

Understanding how these three factors intertwine allows insurers to set premiums that not only