The premium is the price charged by a life insurance company for an insurance or annuity contract. This term arises from the very first insurance arrangements. In the Middle Ages a lender, for an additional payment�or "premium"�over the interest charge, would waive repayment of the loan should the insured vessel or cargo be lost at sea. The expression has survived the practice and is still used to designate the monetary consideration for an insurance company�s promise.

To calculate a premium the first step is to develop a number that equates to the value of benefits promised under the contract. The premium for a life insurance contract is usually expressed as a rate per $1,000 of face amount. On

the other hand, the premium for an annuity contract normally is expressed as a rate per specified amount of income, such as $100 per year or $10 per month. If the premium is paid in one sum, it is called a single premium. Alternatively, the premium may be paid more frequently with annual, semiannual, quarterly, or monthly frequencies occurring most often. In fact, life insurance companies often use the equivalent of daily premiums when adjusting a policy�s death benefit payment either up or down. A downward adjustment reflects any unpaid fractional premiums; an increase reflects the refund of premium amounts paid to cover any period after the insured�s death.

The computation of premiums requires three fundamental assumptions:

The expense rate may provide a margin for contingencies. Only the first two factors�the rate of mortality and the rate of interest�enter the calculation of the net premium. The net premium is sufficient to provide all benefits owed under the contract, whether payable because of death or survival. If the actual experience conforms to the projected experience, the net premiums will be exactly equal to the total of all claims.

The amount added to the net premium to cover expenses of operation, to provide for contingencies, and to allow any profit is called loading. The net premium increased by the loading is called the gross premium, which is the premium payable by the policyowner. This chapter describes how actuaries derive net premiums. Chapter 17 extends this discussion to illustrate the development of gross premiums.