Massachusetts Life Producer Practice Exam

How are level term policies able to provide level premiums?

1. Premiums are fixed for the lifetime of the policy.

2. Premiums are averaged over the term of the policy.

3. Only the initial premiums are low.

4. Premiums adjust based on the insured's lifespan.

The correct answer is: Premiums are averaged over the term of the policy.

Level term policies are designed to maintain stable premiums over a specified term, which can typically range from 10 to 30 years. The correct reasoning behind why they can provide level premiums lies in the concept of averaging. Premiums are calculated upfront based on several factors, including the insured's age, health, and the length of coverage. This allows the insurer to distribute the risk and cost of coverage evenly throughout the entire term of the policy. This means that while the premiums might be higher than a policy that increases over time, they remain fixed for the duration of the term. The insurer takes a complex approach when calculating the risk and expects that not all insured individuals will pass away during the term, thus leading to an average premium amount that remains stable. On the other hand, the other explanations do not accurately capture the mechanics of level term policies, as they either imply transient factors or inaccurately describe the pricing structure.