In the article “How is Life Insurance Priced? (Learn the Hidden Secret),” the general concept of insurance pricing and mortality was explained in a very easy to understand concept. In that article, a reference to a formula was made. In this article, we will break down the actual formula. The formula first computes a single sum that is required to cover the given risk. Once that number is calculated, it is converted to an annual premium.
The base formula is:
NSP = B x dX/LEOA x (DF)N
NSP = Net Single Premium
B = Benefit Amount (Amount of insurance)
dX = Death at (x) year (Chance of dying in (x) years)
LEOA = Life Expectancy at Original Age (When policy is written)
(DF)N = Discount Factor for (N) Number of Years
After that calculation, the net level premium is calculated using this formula:
NLP = LX/LEOA x DF
NLP = Net Level Premium
LX = Probability of Survival at (x) year
LEOA = Life Expectancy at Original Age
DF = Discount Factor
The net level premium calculation will give us a factor. Then we simply make the next calculation to determine the annual premium:
NSP/NLP (factor) = Annual Premium
There you have it, the Math of Death.
© R. Allen Greer, Jr., 2007
