What is mortality rate and how is it used in pricing life insurance?

• A. Mortality rate is the probability of death at each age and is used to estimate expected claims to determine premiums.
• B. Mortality rate is the rate of death claims paid in a given year, used to determine policy fees.
• C. Mortality rate measures policy lapse frequency used to adjust premiums.
• D. Mortality rate is the rate at which a life insurer must reserve funds for dividends.

Answer: (A)

Mortality rate is the probability of death at a given age, taken from mortality tables, and it’s used to estimate how many claims an insurer can expect to pay for a block of policies. When pricing life insurance, actuaries apply these age-specific death probabilities to the policy counts and face amounts to forecast the expected future benefits. They then discount those expected payouts to their present value, add in administrative costs and a profit margin, and set premiums accordingly. This is why the mortality rate directly informs pricing: it translates the uncertain event of death into a quantifiable expected cost that the premium must cover. The other descriptions describe different ideas—such as the annual rate of death claims paid, lapse frequency, or reserves for dividends—which are not the same as the probability of death used in pricing.