South Carolina Life Insurance Practice Exam

In life insurance, what does the term "net premium" refer to?

1. Gross premiums after expenses

2. Base premium without fees

3. Premium after commissions

4. Essentially zero premium

The correct answer is: Gross premiums after expenses

The term "net premium" refers to the amount of premium that an insurance company ultimately retains after accounting for various expenses, including commissions and administrative costs. It represents the portion of the premium that is directly used to cover the risk of loss and to fund the benefits provided by the life insurance policy. While it's important to recognize that "net premium" is often calculated by taking the gross premium and subtracting expenses, the correct understanding hinges on recognizing that net premiums are primarily concerned with projecting the necessary funds to cover insured risks. Therefore, it encapsulates the essence of the premium that contributes to the insurer's reserves and claims payment. The other options suggest different aspects related to premium calculations but do not accurately capture the definition of net premium. For instance, simply stating a base premium without any fees implies a more straightforward calculation without the necessary context of how expenses affect it. Similarly, focusing solely on commissions does not encompass all deductions applied when determining the net premium. Lastly, the notion of an essentially zero premium is unrelated to the concept of net premiums in life insurance.