Advanced Diploma of Financial Planning (ADFP) Practice Test

What happens to life insurance premiums as the insured ages?

1. They decrease steadily

2. They become fixed

3. They rise at a decreasing rate

4. They rise at an increasing rate

The correct answer is: They rise at an increasing rate

As an individual ages, life insurance premiums generally rise due to the increased risk associated with age. Insurers assess the likelihood of a claim being made based on factors like the insured's age, health, and lifestyle. Older individuals often present a higher risk to insurers because the probability of mortality increases with age. Consequently, premiums tend to rise at an increasing rate, reflecting the escalating risk level as each year passes. This rate of increase can be more pronounced in certain types of life insurance products, particularly term policies that may have guaranteed renewability, and in permanent life insurance where cash values and costs of insurance components also influence premium costs. The option describing premiums as becoming fixed does not accurately characterize the nature of life insurance costs over time as they are typically not guaranteed to remain unchanged. Options suggesting a steady decrease or a rise at a decreasing rate also fail to capture the fundamental principle that higher age corresponds to higher risk, and thus typically leads to increasing premiums.