Prospective Reserve

Definition of "Prospective reserve"

Amount designated as a future liability for life or health insurance to meet the difference between future benefits and future premiums, net level premium is determined so that this basic relationship holds: the present value of a future premium equals the present value of a future benefit. This relationship, incidentally, exists in fact only at the point of issuance of a life insurance policy. After that, the value of future premiums is less than the value of future benefits because fewer premiums are left to be paid. Thus, a reserve must be maintained at all times to make up this difference.

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