The MAIN reason why the premium under a Term Assurance policy with automatic indexation increases faster than the increase in cover is?

• A. Commission is payable on each increase in premium
• B. The cost of life assurance cover increases with age
• C. Stamp duty is payable on the increase in cover
• D. The life company imposes an increased administration charge

Answer: (B)

The primary reason why the premium under a Term Assurance policy with automatic indexation increases faster than the increase in cover is that the cost of life assurance cover generally rises as the insured person ages. As individuals age, the risk to the insurer increases, which leads to higher premiums to provide the same level of coverage. This phenomenon is known as the "age-related premium increase."

While the increase in cover due to indexation may adjust the benefit amount to keep pace with inflation or salary increases, these adjustments do not negate the fundamental pricing structure that factors in the policyholder’s age. Therefore, even though the amount of coverage increases, the corresponding premium climbs at a greater rate because it reflects the heightened risk associated with the insured reaching advanced age.