Tennessee Insurance Practice Exam

What is the underlying concept regarding level premiums?

1. The total premium is paid upfront

2. The early years are charged more than what is needed

3. The premium decreases as the policy matures

4. Premiums are adjusted annually

The correct answer is: The early years are charged more than what is needed

Level premiums are designed to provide stability and predictability in the cost of insurance over the life of a policy. With this approach, the insured pays a consistent premium amount that remains the same throughout the duration of the policy. In the early years of a level premium policy, the amount paid is often higher than the actual cost of insurance for that period. This surplus collected in the form of higher premiums serves as a reserve that balances out lower premiums in later years when the cost of coverage increases due to growing age and risk factors. Thus, the higher initial charge helps to ensure that the overall cost of insurance remains stable and manageable for the policyholder over time. This concept of overpaying in the initial years serves as a foundation for level premium policies, ensuring that both the insurer and insured can manage long-term financial planning and risk.