At the end of this lesson, the student should have understood e The meaning of the words ‘premium’, ‘bonus’ and ‘surplus’ in life insurance ¢ The significance of probability and mortality tables © How these are calculated ¢ The rationale for the determination of all these ¢ How these are different from price and profits in mercantile practice ¢ The importance of life fund and actuarial valuation WHAT IS PREMIUM L. In acontract of insurance, the insurer promises to pay to the policyholder a specified sum of money, in the event of a specified happening. The policyholder has to pay a specified amount to the insurer, in consideration of this promise. ‘Premium’ is the name given to this consideration that the policyholder has to pay in order to secure the benefits offered by the insurance contract. It can be looked upon as the price of the insurance policy. It may bea one-time payment. That is not common. Often, ithas to be paid regularly over a period of time. Adefault in premium can endanger the continuance of the policy. If that happens, the policy will be treated as ‘lapsed’ and the expected benefits may not be available. The consequences of default are specified in the policy conditions, which will be discussed ina later chapter. The calculation of premium is a complex technical process, involving actuarial and statistical principles. Only trained professionals, called actuaries, do it. Tables of premium rates for each plan of insurance are made available by insurance companies for the use of agents, who are required to quote the premium for a particular policy being offered toa prospect. This chapter is meant to make agents aware of the rationale behind the premium calculations.