South Carolina Life Insurance Practice Exam

If an insured notices a significant decrease in the cash value of their policy over a month, what type of policy do they likely have?

1. Variable Life Insurance

2. Term Life Insurance

3. Whole Life Policy

4. Cash value is paid to the policyowner

The correct answer is: Whole Life Policy

The situation described indicates that the insured is observing a significant decrease in the cash value of their policy. Under a whole life policy, cash value is typically stable and grows at a guaranteed rate, supplemented by dividends from the insurance company. A significant decrease in cash value is not characteristic of this type of policy. In contrast, variable life insurance allows policyholders to allocate their cash value to various investment options, such as stocks and bonds. The cash value, and consequently the death benefit, can fluctuate based on the performance of those investments. Therefore, if the cash value significantly decreased within a short period, it would likely be due to poor investment performance, indicating that the policy is a variable life insurance policy. Term life insurance, on the other hand, does not have a cash value component at all; it provides pure death benefit protection for a specified period and hence would not demonstrate any cash value fluctuations. The option stating "cash value is paid to the policyowner" does not apply as it does not specify a type of policy and could misinterpret what is generally applicable in life insurance policies. Thus, based on the situation described, the insured is likely to have a variable life insurance policy, as this is the type that can lead to observable decreases