Deductible
Deductibles are typically used to deter the large number of claims that a consumer can be reasonably expected to bear the cost of. By restricting its coverage to events that are significant enough to incur large costs, the insurance firm expects to pay out slightly smaller amounts much less frequently, incurring much higher savings. As a result, insurance premiums are typically cheaper when they involve higher deductibles. For example, health insurance companies offer plans with high premiums and low deductibles, or plans with low premiums and high deductibles. One plan may have a premium of $1,087 a month with a $6,000 deductible, while a competitive plan may have a premium of $877 a month with a $12,700 deductible. The consumer with the $6,000 deductible will have to pay $6,000 in health care costs before the insurance plan pays anything. The consumer with the $12,700 deductible will have to pay $12,700.
International Life Assurance Society
Under any reserve methodology for life insurance policies, the actuarial liability under the policy is equal to the present value of the amounts expected to be paid on account of the policy, offset by the present value of the amounts expected to be received from the policyholder via future premium payments. The amounts expected to be paid by the company include not just the contracted benefits themselves, but also the expenses that will be incurred in servicing the policy, as well as any dividends that will be paid to the policyholder in future years. The entire calculation is intended to quantify the amount of assets that need to be held "in reserve" for payment of those future benefits, expenses and dividends. Under the "net premium" variation used by Wright, there is no explicit estimate of future expenses and dividends. Instead, the first portion of the calculation (i.e., the present value of amounts expected to be paid by the company) reflects only the contracted benefits, and does not reflect any expenses or dividends that are also expected to be paid. This "error" is corrected in the second portion of the calculation, wherein the offset portion of the calculation uses a theoretical "net" premium that is typically much lower than the premium actually being paid by the policyholder. By offsetting a smaller amount for the present value of the expected future premiums, the future expenses and dividends are taken into account, albeit in an indirect manner.