What is "mortality risk" in life insurance?

Mortality risk pertains to the possibility that an insured individual will pass away within a specified period, thereby invoking a financial obligation for the insurance company to provide a death benefit to the beneficiaries named in the policy. This concept is fundamental to life insurance, as it directly influences the underwriting process and premium calculations. Insurance companies assess a range of factors, including the insured’s age, health history, and lifestyle choices, to evaluate this risk.

Understanding mortality risk is crucial for insurers because it helps them estimate how much premium they need to collect in order to cover the anticipated payouts for deaths that occur among their insured population. The greater the mortality risk, the higher the premiums might need to be to ensure the company remains financially viable. This relationship is foundational to the life insurance industry and impacts how policies are priced and underwritten.

The other options, although they touch on aspects related to life insurance, do not accurately define mortality risk. For example, policy lapses occur when a policyholder stops paying premiums, which is a different issue from the assessment of mortality risk. Profitability measures overall financial performance but does not specifically address the risks related to mortality. While the age of the policyholder is an important factor in determining mortality risk, it does not encompass the broader definition