West Virginia State Life Insurance Practice Exam

Quarterly premium payments increase the annual cost of insurance because:

1. They reduce the total coverage amount

2. Interest to the insurer is decreased while the administrative costs are increased

3. They incur higher policy fees

4. They require additional underwriting

The correct answer is: Interest to the insurer is decreased while the administrative costs are increased

Making quarterly premium payments increases the overall annual cost of insurance primarily because it results in reduced interest for the insurer, coupled with higher administrative costs. When policyholders opt for quarterly payments instead of paying annually, the insurer is unable to earn as much interest on those premiums in the interim period. This reduced opportunity for earning interest generally means that the insurer needs to compensate for that lost revenue. At the same time, quarterly payments come with higher administrative costs, as processing payments more frequently requires more resources, time, and handling. These combined factors—lower interest income and increased administrative expenses—lead to a situation where the annual cost of the insurance policy is effectively raised for those who pay on a quarterly basis compared to those who pay annually.