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Life Insurance Premium Pricing Methods

Two main systems have historically existed in relation to life insurance calculation methods. These systems are known as Natural Premium Pricing and Level Premium Pricing; however, they might also be referred to as Traditional Premium Pricing and Modern Premium Pricing.

Please note that while we have included an explanation about Natural Premium Pricing that this calculation method is no longer widely used in the Hong Kong insurance industry for long term life insurance products.

Natural Premium Pricing on Life Insurance Plans

Natural Premium Pricing was long the only way to calculate life insurance premiums. While it was based on a logical system it has a number of fatal flaws which make it largely unworkable for long term insurance products, like life insurance.

A major feature of policies which used the Natural Premium Pricing system is that premiums did not remain level over the course of the plan. While products like Universal Life Insurance have flexible premiums, the premiums of a Natural Pricing plan were individually calculated each year at the policy renewal.

This means that under a plan with natural pricing premiums are much more likely to increase each year as the policyholder ages, which poses a number of significant issues – not in the least of which is the fact that age often decreases purchasing power and that older people usually have less funding available for insurance coverage.

Consequently, natural pricing is not normally used for plans which are actually intended to exist for a long term period.

Level Premium Pricing on Life Insurance Plans

The level premium pricing system is a much more modern pricing method and makes extensive use of mortality tables and actuarial calculations in setting a premium which remains unchanged, or level, across the entire lifetime of a policy.

The level premium pricing system is a much more modern pricing method and makes extensive use of mortality tables and actuarial calculations in setting a premium which remains unchanged, or level, across the entire lifetime of a policy.

 This level premium is based on factors which are outlined on the page Life Insurance Premium Factors.

The consequences of offering a level premium across the course of the policy is that the policy must be in force for quite some time before parity is reached between the policyholder and the insurance company. That is to say, the premium being paid may be too excessive to cover the risk in the earlier years of the plan; but the premium may also be too little for the relative risk in the later years, if it were being calculated on a natural system.

With the premium remaining level across a large number of the years the insurer receives a guaranteed source of funds which it can use to invest, and which will in turn build up a benefit for the policyholder.

Cash and Surrender Values

When dealing with life insurance it is important that only the policyholder can cancel the contract. Under plans using the level premium system, after enough premiums have been paid the plan will normally begin to accumulate a cash value.

When a policyholder decides to cancel a life insurance plan after a long enough period of time he will normally be owed a payment in the form of the plan’s total cash value – also known as a surrender value. However, many insurers will level a surcharge in the event that a policyholder cancels their plan, also known as a surrender charge, which is applied to the benefit payment to the policyholder.

Term Life Insurance plans in Hong Kong have no Cash Value association.

Policy Loan

A policy’s cash value can be used as security on a loan from the insurer. Please click Hong Kong Life Insurance Policy Loan for more information.


A policy’s cash value can be used to prevent forfeiture in the event of premium lapse. Please click Hong Kong Life Insurance Non-Forfeiture Benefits for more information.

Lowered Face Values: Paid Up Coverage

After a certain point the Cash value may be enough for the policyholder to decide that he no longer wants to pay the premium he can opt to have a fully paid policy and receive an adjustment death benefit. This is in line with the premiums saved by having the policy be fully paid and the lowered cash value from the cessation in payments.

Free Hong Kong Life Insurance Advice

If you would like to receive a free advice for a Hong Kong life insurance plan, or if you would like to learn more about the different premium pricing systems which can be used in calculating a life insurance premium, please complete the short form at the top of this page.

You can also speak to a CCW Global Life Insurance broker to discuss any questions you may have by Contacting Us Today.


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