California Life and Health Insurance Practice Exam

What does the term 'mortality' in life insurance premium rates primarily refer to?

1. Investment returns

2. Insurance company expenses

3. Risk of death

4. Policy surrender rates

The correct answer is: Risk of death

The term 'mortality' in the context of life insurance premium rates primarily refers to the risk of death. When calculating premiums, insurance companies assess the likelihood that a policyholder will pass away during a specified time frame. This assessment involves statistical analysis of various demographic factors such as age, health status, and lifestyle choices. The mortality rate directly impacts how much a policyholder will pay in premiums; the higher the risk of death, the higher the premiums, as the insurer anticipates a greater likelihood of having to pay out the death benefit. The other options, while relevant to the overall structure of insurance and financial products, do not directly define mortality. Investment returns pertain to the growth of the insurer's assets, expenses relate to the operational costs of running the insurance company, and policy surrender rates focus on the frequency at which policyholders discontinue their policies. None of these factors address the core meaning of mortality as it directly influences the assessment of risk associated with life insurance.