The gross premium charged for a life insurance policy is designed to cover:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The gross premium is built from the mortality charge, the expense loading for acquisition, administration, and commissions, and an assumed rate of investment return that reduces the amount needed from the insured. The net premium is the amount needed for mortality after crediting the assumed investment earnings; adding expenses and a margin produces the gross premium. A higher assumed investment return lowers the premium, while higher expenses raise it. The pricing process must also account for expected mortality improvement and a profit margin. Understanding these components explains why different products carry different premiums.
Why the other options are wrong
- Mortality alone represents the net premium basis, not the full gross premium the policyowner actually pays.
- Expenses alone are only one component of the gross premium and cannot fund the death benefit by themselves.
- Commissions are part of the expense loading, and dividends are a separate participating-policy feature; together they do not constitute the premium basis.
Memory hook
Gross premium = mortality + expenses, minus the interest credit. Three ingredients, one price.