PSI Life Exam Practice Test

In life insurance, what does the term 'premium' refer to?

1. The amount paid for coverage

2. The benefit received upon death

3. The total cash value

4. The interest earned on the policy

The correct answer is: The amount paid for coverage

The term 'premium' in life insurance specifically refers to the amount that an insured individual pays to the insurance company to maintain coverage. This is typically paid on a regular schedule, such as monthly or annually. The premium is essential because it funds the insurance policy and provides the policyholder with the protection promised in the contract, which includes a death benefit payable to beneficiaries upon the insured’s death. Understanding the nature of premiums is crucial because they not only determine the cost of the insurance protection but are also influenced by various factors including the insured's age, health, and the amount of coverage desired. In contrast, the other choices refer to different aspects of life insurance. The benefit received upon death is the death benefit, which is a separate concept from premiums. The total cash value pertains to permanent life insurance policies that accumulate cash over time, and interest earned on the policy often relates to how the cash value grows, which is also different from the premium payment itself. Thus, recognizing 'premium' as the required payment for insurance coverage helps clarify the overall structure of life insurance policies.