Final answer:
Changing life insurance premiums from annual to quarterly payments generally increases the total annual cost due to administrative fees and the time value of money.
Step-by-step explanation:
When a policyowner decides to pay life insurance premiums quarterly instead of annually, the total outlay of annual premium dollars will be increased. This is because insurers typically charge extra fees for the administrative costs associated with processing more frequent payments. For example, if an annual premium is $1,200, paying quarterly might result in payments of $310 each quarter, totaling $1,240 at the end of the year.
Additional costs may also arise from the time value of money, where funds that could have been invested or used in other capacities now are tied up in the premium payments. Conversely, paying annually might provide a cost saving compared to paying more frequently. Therefore, a transition to quarterly payments generally leads to a greater total financial commitment over the same period than an annual lump-sum payment. This principle applies not just in life insurance but in many scenarios where periodic payments are an option.