Net Annual Premium
The net annual premium is a type of term life insurance for which the premiums remain the same throughout the duration of the contract. The premium paid on this type of policy will be higher at the beginning of its life but lower towards the end of its life as compared to term policies that have rising premium rates. Net premium is the expected present value of a policy’s benefits less the expected present value of future premiums.
The net premium calculation does not take into account future expenses associated with maintaining the policy. As net premium does not consider the expenses to be incurred in its calculation, companies usually add them to the net premiums to arrive at the gross premium. The calculated difference between net premium and gross premium equals the expected present value of expense loadings, less the expected present value of future expenses.
These expenses include commissions for the agents who sold the policies, legal expenses in settlement, salaries, taxes and other administrative expenses. In determining their amount, companies usually use a combination of fixed expenses and an allowed percentage of flat loading to the net premium.
