Advanced Diploma of Financial Planning (ADFP) Practice Test

Why is term life insurance often more expensive in the early years of the policy?

1. It includes higher fees for administrative costs

2. It is a type of temporary pure death protection

3. It accumulates cash value quickly

4. It offers extensive additional benefits

The correct answer is: It is a type of temporary pure death protection

Term life insurance is generally structured to provide coverage for a specified period, such as 10, 20, or 30 years, making it a straightforward product focused primarily on death protection. The premium costs are typically influenced by the age, health, and gender of the insured at the time of policy issuance. While it may seem counterintuitive, term life insurance can be more expensive in the early years because, in this initial phase, insurers are accounting for the higher risk of mortality among younger individuals. This is because these early years involve a higher calculation of risk; if the insured were to pass away early in the term, the insurer would have a larger payout obligation relative to the contributions made through premiums. Overlaying this aspect is the profile of many insured individuals who choose term life for the most immediate protection, often at a younger age when premiums are least costly compared to whole life or permanent policies. Therefore, the characterization of term life insurance as a type of temporary pure death protection accurately reflects its cost structure and the rationale behind the pricing during the early years of the policy. In contrast, options that discuss elements like administrative costs, cash value accumulation, or extensive additional benefits do not apply as aptly to term life insurance, as it