South Carolina Life Insurance Practice Exam

In a whole life insurance policy, what feature contributes to the buildup of cash value over time?

1. Fixed premiums

2. The investment component

3. Exclusivity of benefits

4. Term duration of coverage

The correct answer is: Fixed premiums

The buildup of cash value in a whole life insurance policy is primarily driven by the investment component. Whole life insurance combines a death benefit with a savings element, where a portion of the premiums paid contributes to a cash value account. This cash value grows over time at a guaranteed rate, plus any dividends that the insurer may declare, which are typically based on the company's performance. While fixed premiums are an essential aspect of whole life policies, they primarily ensure that policyholders pay the same amount throughout the life of the policy, regardless of age or health status. The fixed premiums provide predictability for budgeting and maintaining coverage but are not the direct reason for cash value accumulation. The other choices—exclusivity of benefits and the term duration of coverage—do not align with the nature of whole life insurance. Exclusivity refers to specific features of the policy and does not contribute to cash value growth, while term duration pertains to term life insurance, which does not build cash value at all. Thus, the investment component is the key feature that enables the cash value to accumulate and grow, distinguishing whole life insurance from other insurance products.