How is mortality cost calculated?

Mortality cost refers to the expense associated with the risk of death that insurance companies must account for when pricing life insurance policies. The purpose of this calculation is to determine the expected cost that the insurer will incur due to the mortality risk of policyholders.

When calculating the mortality cost, the process involves taking the face amount of the insurance policy, which represents the sum that will be paid out upon the death of the insured, and multiplying it by the probability of death. The probability of death reflects the statistical likelihood that an individual of a certain age and health status will pass away within a specific period, usually represented as a percentage or a decimal fraction.

Thus, multiplying the face amount by the probability of death gives the insurer a forecasted cost of potential death claims that could arise from the policies they have issued. By accurately determining mortality costs, insurance companies can better manage their finances and set premiums that ensure they can meet future obligations to policyholders. This approach allows for a balanced consideration of risk and stability in their insurance offerings.