South Carolina Life Insurance Practice Exam

In a cash value life insurance policy, what happens to the cash value over the life of the policy?

1. It remains unchanged

2. It increases over time

3. It can only decrease

4. It becomes taxable upon policy maturity

The correct answer is: It increases over time

In a cash value life insurance policy, the cash value typically increases over time. This growth occurs because a portion of the premiums paid by the policyholder is allocated to the cash value component. The cash value accumulates on a tax-deferred basis, meaning the policyholder does not have to pay taxes on this growth until they withdraw it, subject to certain conditions. As the policyholder continues to pay premiums, the cash value can grow due to the compounded interest earned by the account, as well as additional contributions made to it. This accumulation can serve as a savings component, allowing policyholders to access funds via loans or withdrawals throughout the life of the policy. While some factors can affect the growth of cash value, such as policy fees or a drop in the insurer's dividends (in participating policies), the general expectation is that it will increase over time. This feature differentiates cash value policies from term life insurance, which does not accumulate cash value.