West Virginia State Life Insurance Practice Exam

What is usually the term used to refer to the cost of insurance that rises with increased payment frequency?

1. Expense ratio

2. Administrative cost

3. Cumulative premium cost

4. Insurance surcharge

The correct answer is: Administrative cost

The term that refers to the cost of insurance that rises with increased payment frequency is the administrative cost. When policyholders choose to make premium payments more frequently—such as monthly instead of annually—the insurance company incurs additional administrative expenses. These can include costs related to processing transactions more often, maintaining records, and managing accounts. Therefore, the overall cost to the policyholder increases, reflecting the additional administrative burden on the insurer. It’s important to recognize that while other terms might appear relevant, they don't specifically capture the nuances of costs associated with payment frequency. The expense ratio, for instance, typically refers to the ratio of an insurer's administrative and operational expenses to its premiums, but it does not directly indicate that those costs increase with payment frequency. The cumulative premium cost generally refers to the total payments made over time rather than how those payments are structured. An insurance surcharge commonly refers to additional costs imposed under certain conditions, rather than being a direct result of payment frequency alone. Thus, administrative cost is the most appropriate term reflecting the increased costs tied to frequent premium payments.