Advanced Diploma of Financial Planning (ADFP) Practice Test

Which statement best describes the relationship between death rates and term insurance premiums?

1. Premiums decrease as clients age

2. Premiums remain constant throughout life

3. Premiums increase at an increasing rate as clients age

4. Premiums are unrelated to death rates

The correct answer is: Premiums increase at an increasing rate as clients age

The statement that premiums increase at an increasing rate as clients age accurately reflects the dynamics of term insurance premiums in relation to death rates. This is primarily due to the fact that as individuals age, their risk of mortality increases. Insurers base their premiums on the statistical assessment of mortality rates, which means that the likelihood of a claim being made rises with age. Consequently, insurers adjust the premiums to account for this heightened risk of death, leading to higher premiums for older clients. Moreover, the nature of life insurance, particularly term insurance, is that the premium structure becomes more sensitive to age, often resulting in an exponential increase rather than a linear one. Therefore, as clients grow older, the increment in premiums tends to accelerate, reflecting both their increased mortality risk and the financial considerations that insurers must adopt to remain profitable while fulfilling claims. This nuanced understanding of how mortality impacts insurance pricing is crucial for those in the financial planning field, as it can affect client advice regarding insurance purchasing timelines and the overall financial planning strategy for risk management.