AD Banker Comprehensive Practice Exam

With regard to life insurance policies, loading refers to which of the following?

1. The amount of money the insurance company reserves for expected mortality costs

2. The amount the company anticipates for dividend payout

3. Assignment of the appropriate share of the company's operating expenses to each policy

4. Surrender charges applied to the cash surrender of the policy

The correct answer is: Assignment of the appropriate share of the company's operating expenses to each policy

Loading in the context of life insurance policies refers to the assignment of the appropriate share of the company's operating expenses to each policy. This concept is crucial for understanding how insurance premiums are calculated. Insurance companies incur various expenses, such as administrative costs, marketing, claims processing, and underwriting costs. Loading ensures that these expenses are accounted for in the premiums charged to policyholders. This allocation helps the insurer to maintain financial stability and operate effectively while providing coverage. It's important for policyholders to understand that their premiums not only cover the risk of mortality and claims payouts but also contribute to the operational costs required to provide those services. In contrast, the other options relate to different aspects of insurance policies, such as mortality costs or dividends, which do not directly pertain to the concept of loading.