New Jersey Life and Health State Practice Exam

What happens to the total amount of premium paid for an insurance policy when the payment frequency increases?

1. Remains the same

2. Decreases

3. Increases

4. Doubles

The correct answer is: Increases

When the payment frequency for an insurance policy increases, the total amount of premium paid generally increases. This is primarily due to the way that many insurers structure their payment options. When policyholders choose to make payments more frequently, such as monthly rather than annually, insurers often charge more in total premiums due to their administrative costs and the financial implications of carrying a smaller amount of premium for a shorter duration. Insurers may also incorporate a convenience fee for more frequent payments. For example, if a policyholder opts for monthly payments, they might end up paying a slightly higher total premium compared to if they had paid the annual premium all at once. This is because with the annual payment option, the insurer receives the entire premium upfront, reducing administrative costs and cash flow uncertainties. Thus, it is common for the total premium paid to increase with more frequent payment options.