West Virginia State Life Insurance Practice Exam

Why do quarterly premium payments lead to an increased annual cost of insurance?

1. It reduces the coverage amount

2. It causes administrative costs to decrease

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

4. It requires more frequent payment processing

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

Quarterly premium payments generally lead to an increased annual cost of insurance because they decrease the interest earnings for the insurer while increasing administrative costs. When policyholders pay premiums more frequently, the insurance company has access to those funds for a shorter period of time compared to a scenario where the premiums are paid annually. This reduced time frame translates to a lower opportunity for the insurer to earn interest on those premium funds, potentially increasing the overall cost to policyholders. Additionally, more frequent premium payments necessitate additional processing and administration work, thereby raising operational expenses. These factors combined typically lead to higher costs when premiums are paid quarterly rather than annually, which is why this option is correct. The other options do not accurately reflect the dynamics of premium payment frequency and its financial implications for both the insurer and the insured.