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Simple English definitions for legal terms
natural premium
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A quick definition of natural premium:
A natural premium is the actual cost of life insurance based solely on mortality rates. It is the amount of money that an insurance company needs to collect to pay out claims based on the likelihood of certain events happening. This amount is calculated without including any additional expenses or commissions. It is important to understand the natural premium when purchasing life insurance to ensure that you are getting the best value for your money.
A more thorough explanation:
Definition: The actual cost of life insurance based solely on mortality rates. This amount will be less than a net premium.
Example: Let's say a 30-year-old non-smoker wants to buy a life insurance policy with a death benefit of $500,000. The insurance company calculates the natural premium based on the person's age, gender, and health status. If the natural premium is $500 per year, the net premium (which includes expenses and profit for the insurance company) might be $700 per year.
Explanation: The natural premium is the minimum amount an insurance company needs to charge to cover the expected cost of claims based on mortality rates. It doesn't include any additional expenses or profit for the company. In the example, the insurance company might charge a net premium of $700 to cover its expenses and make a profit. The difference between the natural premium and the net premium is the loading, which is the amount the insurance company adds to cover its expenses and profit.