Net Single Premium
Net single premium is the present value of the expected cost of paying a death benefit. It is a premium that covers the present value of future claims. Parallel to the amount you should expect to pay upfront as a lump sum for paid-up insurance. Generally, the older you are, the higher the net single premium as a percentage of face value of the insurance coverage. It is a pure cost of protection, or the premium covering the present value of future claims.
The net single premium is always the sum of the present values of all the expected benefits. It may, however, be computed according to either of two techniques. The first uses probability for each insured and is called the individual approach. The second assumes a large group of insured’s and is called the aggregate approach. The objective of life insurance rate making is to assure that the company collects enough from each group of insured’s to pay the benefits promised under the contract. If the contract is purchased with a single or lump sum, that sum is the present value of future benefits. The great advantage to single-premium life insurance is that the single payment fully funds the policy, immediately guaranteeing a sizable death benefit to the beneficiaries.
