Earned interest from invested premiums is used in calculating premium. What is the effect of this earned interest on the premium due?

Earned interest from invested premiums is used in calculating premium. What is the effect of this earned interest on the premium due?

• A. It reduces the amount of premium due.
• B. It increases future premiums.
• C. It has no effect on premium.
• D. It is paid to the policyowner as a dividend.

Answer: (A)

When premiums are invested, the earnings from those investments are used to offset the policy’s costs. That investment income effectively lowers what you still owe in future premiums, so the premium due is reduced. It isn’t typically paid out as a separate dividend or used to increase future premiums; the earned interest simply lowers the amount of premium you must pay at the next due date. For example, if the policy’s future premium would be $1,000 but the earned interest credited reduces costs by $100, you’d owe about $900 next period, assuming other factors stay the same.

When premiums are invested, the earnings from those investments are used to offset the policy’s costs. That investment income effectively lowers what you still owe in future premiums, so the premium due is reduced. It isn’t typically paid out as a separate dividend or used to increase future premiums; the earned interest simply lowers the amount of premium you must pay at the next due date. For example, if the policy’s future premium would be $1,000 but the earned interest credited reduces costs by $100, you’d owe about $900 next period, assuming other factors stay the same.