Legal Definitions - net single premium

Net Single Premium

The net single premium refers to the theoretical, one-time lump sum payment that, according to actuarial calculations, is just enough to cover all future benefits promised by an insurance policy. This calculation considers factors like expected mortality rates (how long people are likely to live) and anticipated investment earnings on the premium. Crucially, the net single premium does not include any allowances for the insurance company's operating expenses, administrative costs, sales commissions, or profit margins. It represents the pure cost of the insurance benefit itself, before any additional charges are added by the insurer.

• Example 1: Whole Life Insurance

  A 40-year-old individual wishes to purchase a whole life insurance policy with a $250,000 death benefit, but prefers to pay for the entire policy with a single upfront payment rather than annual premiums. The insurance company's actuaries would calculate the net single premium by estimating the present value of that $250,000 payout, considering the individual's life expectancy and the company's projected investment returns on the premium over many decades. This calculated amount represents the minimum theoretical sum required to fund the death benefit, without yet factoring in the insurer's operational costs, marketing expenses, or profit margin.

• Example 2: Immediate Annuity

  An individual nearing retirement wants to purchase an immediate annuity that will provide a guaranteed income of $3,000 per month for the rest of their life, starting next year. To determine the initial lump sum required, the insurance company's actuaries calculate the net single premium. This involves estimating the present value of all future $3,000 monthly payments, taking into account the individual's age, gender, life expectancy, and the insurer's expected investment earnings. This figure is the pure actuarial cost of funding those future income payments, before any additions for the insurance company's administrative overhead or profit.