Final answer:
To calculate a net single premium, an insurance company would subtract interest earned on premiums from the cost of mortality. This reflects the income generated by the insurance company through its investments, which offsets the mortality costs. Loading expenses, policy dividends, and investment returns are not subtracted for this calculation.
Step-by-step explanation:
To calculate a net single premium for life insurance, an insurance company would subtract interest earned on premiums from the cost of mortality. This is because the interest earned on premiums represents the return on investments of the funds held by the insurance company, which are invested in assets that are fairly safe and liquid. These investments provide additional income to the company and can therefore offset the cost of mortality. The other options, such as loading expenses, policy dividends, and investment returns, are not typically subtracted when computing net single premiums. Loading expenses are added to cover operating costs, policy dividends are returned to policyholders, and investment returns are part of the gains from invested premiums.
Mortality costs reflect the amount the insurance company expects to pay out for death claims. By earning interest on the premiums collected, insurance companies generate revenue that can be subtracted from these expected costs when determining the net single premium. It’s important to note that the major costs for insurance companies include not only claims payments but also administrative expenses associated with running the business.