Legal Definitions - interest factor

Definition: In the insurance industry, the interest factor is an estimate of the interest or rate of return that an insurer will earn on premium payments over the life of a policy. It is used to calculate premium rates for life insurance policies.

Example: Let's say a person purchases a life insurance policy with a premium of $100 per month. The insurer estimates that they will earn a 5% interest rate on the premium payments over the life of the policy. This means that the interest factor for this policy is 1.05.

Explanation: The interest factor is an important element in determining the premium rates for life insurance policies. It takes into account the expected rate of return on the premium payments, which helps the insurer to calculate the amount of money they will need to pay out in claims and still make a profit. In the example above, the interest factor of 1.05 means that the insurer expects to earn an additional 5% on the premium payments over the life of the policy.