Which statement about time value and present value related to premiums and benefits is true?

Which statement about time value and present value related to premiums and benefits is true?

• A. Present value concepts are not used in pricing premiums.
• B. Future money is always worth more than money today.
• C. Present value and discounting are used to price premiums and future benefits.
• D. Time value does not affect insurance pricing.

Answer: (C)

The main idea is the time value of money and how it drives insurance pricing. Money available today can be invested to earn interest, so a dollar now is worth more than a dollar later. In pricing premiums, insurers convert all expected future payments—like benefits to be paid to policyholders—into their present value by discounting them at a chosen rate. The premium charged today must cover this present value of future benefits plus expenses, and it also reflects the investment income the insurer can earn on the paid premiums. That’s why present value and discounting are used to price premiums and future benefits. Statements suggesting present value isn’t used, that future money is worth more than today, or that time value doesn’t affect pricing aren’t accurate because the whole pricing approach relies on discounting future obligations to their present value and recognizing how investment returns influence how much premium is needed.

The main idea is the time value of money and how it drives insurance pricing. Money available today can be invested to earn interest, so a dollar now is worth more than a dollar later. In pricing premiums, insurers convert all expected future payments—like benefits to be paid to policyholders—into their present value by discounting them at a chosen rate. The premium charged today must cover this present value of future benefits plus expenses, and it also reflects the investment income the insurer can earn on the paid premiums. That’s why present value and discounting are used to price premiums and future benefits.

Statements suggesting present value isn’t used, that future money is worth more than today, or that time value doesn’t affect pricing aren’t accurate because the whole pricing approach relies on discounting future obligations to their present value and recognizing how investment returns influence how much premium is needed.