Colorado Life Producer License Practice Test

What is considered the least expensive first-year premium payment option?

1. Whole life insurance

2. Universal life insurance

3. Annually renewable term

4. Term life insurance

The correct answer is: Annually renewable term

The least expensive first-year premium payment option is term life insurance. This type of insurance provides coverage for a specified period, typically ranging from one to thirty years. The primary reason it is less expensive in the first year is that it does not have an investment component or cash value accumulation, which contributes to higher costs in whole life and universal life insurance policies. When you purchase term life insurance, you are paying solely for the cost of the insurance coverage itself. Since it only pays a death benefit if the insured passes away during the term, it carries a lower risk from the insurer's perspective compared to permanent life insurance products, which promise benefits regardless of when the insured dies, provided premiums are paid. This affordability of term life insurance makes it appealing for individuals seeking to secure a death benefit at a lower cost, especially in the formative years of financial planning. In contrast, whole life and universal life insurance involve not only a death benefit but also a savings or investment aspect, driving their premiums higher.