An indeterminate premium life insurance policy is characterized by which of the following?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
An indeterminate premium policy sets a guaranteed maximum premium in the contract, but charges a lower initial premium based on current assumptions about mortality, expenses, and interest. If actual experience is worse than assumed, the insurer may increase the premium up to the guaranteed maximum. Unlike the flexible premium of a universal life policy, which the policyowner controls, an indeterminate premium is set and adjusted only by the insurer, and only up to the guaranteed maximum. This gives the policyowner the benefit of lower initial costs while capping the insurer's future premium at a known maximum.
Why the other options are wrong
- B) A premium guaranteed never to change describes a fixed level premium policy; the very purpose of the indeterminate design is a possible change up to the cap.
- C) Premiums do not automatically decrease with age; the initial premium is simply below the contractual maximum.
- D) The initial premium is set below the maximum, not at the maximum, and dividend reduction is a feature of participating policies.
Memory hook
Indeterminate: start low, cap known. The insurer can climb toward the maximum only if experience turns sour.