If it is expected that out of 10,000 persons at a specified age, the probability is that one may die within one year, the mortality rate at that age is said to be 0.01%. The risk premium chargeable for persons at that age would be Rs.0.10 per rs.1,000SA. If a policy has a term of 20 years, the risk premium and therefore, the premium charged, would vary for each of the 20 years. It would be increasing steadily from year to year. It would be difficult to administer annual changes in a continuing contract. Apart from that, the premium at later ages, towards the end of the policy term, would be very high and people may find it beyond their ability to pay. They will then be without the protection of insurance at times when they need it most. To offset this problem, insurers spread the risk premium on a uniform basic throughout the term of the policy. the premium remains constant for 20 years. Such uniform premium is called Level Premium. This implies that the premium collected would be more than necessary for the risk in the early ages, and less than necessary for the risk in the early ages, and less than necessary towards the latter part of the policy.
If it is expected that out of 10,000 persons at a specified age, the probability is that one may die within one year, the mortality rate at that age is said to be 0.01%. The risk premium chargeable for persons at that age would be Rs.0.10 per rs.1,000SA. If a policy has a term of 20 years, the risk premium and therefore, the premium charged, would vary for each of the 20 years. It would be increasing steadily from year to year. It would be difficult to administer annual changes in a continuing contract.
Apart from that, the premium at later ages, towards the end of the policy term, would be very high and people may find it beyond their ability to pay. They will then be without the protection of insurance at times when they need it most. To offset this problem, insurers spread the risk premium on a uniform basic throughout the term of the policy. the premium remains constant for 20 years. Such uniform premium is called Level Premium. This implies that the premium collected would be more than necessary for the risk in the early ages, and less than necessary for the risk in the early ages, and less than necessary towards the latter part of the policy.