Legal Definitions - natural premium

A natural premium refers to an insurance premium that is calculated annually and is precisely sufficient to cover the expected cost of claims for an insured individual during that specific year. This type of premium is directly tied to the current risk profile of the insured, meaning it typically increases each year as the individual ages and their statistical risk of making a claim generally rises. It does not include any component designed to build up reserves for future years or to maintain a level premium over a longer period.

• Example 1: Annually Renewable Term Life Insurance

  A 35-year-old individual purchases a one-year renewable term life insurance policy. The premium for that year is calculated based solely on the mortality rates and expected claims for individuals aged 35. When they renew the policy at age 36, the premium increases because the statistical risk of death for a 36-year-old is slightly higher than for a 35-year-old. This annual adjustment, reflecting only the current year's risk without any long-term averaging, is a natural premium.

• Example 2: Short-Term Disability Income Insurance

  Consider a short-term disability income insurance policy that is renewed annually. For a 40-year-old professional, the premium for the current year is determined by the statistical likelihood of a 40-year-old becoming disabled and unable to work for a short period. When the policy is renewed the following year at age 41, the premium is recalculated based on the slightly increased risk of disability for a 41-year-old. This yearly adjustment, reflecting only the current year's risk of disability, exemplifies a natural premium.