South Carolina Life Insurance Practice Exam

What distinguishes whole life insurance from term insurance?

1. Whole life insurance has a set term

2. Whole life insurance builds cash value

3. Whole life insurance has lower premiums

4. Whole life insurance covers only specific events

The correct answer is: Whole life insurance builds cash value

Whole life insurance is distinguished from term insurance primarily by its ability to build cash value over time. This cash value component serves as a savings feature that grows tax-deferred, allowing policyholders to borrow against it or withdraw from it as needed. In contrast, term insurance provides coverage only for a specific period without any cash value accumulation; once the term ends, the coverage ceases, and there is no return on premiums paid. The cash value aspect of whole life insurance not only offers a financial benefit during the policyholder's lifetime but also contributes to the policy's overall potential as a long-term financial asset. As premiums are paid, part goes toward the cost of insurance, while the remainder contributes to the building of cash value, enhancing the policy's appeal as a lifetime financial planning tool. This intrinsic difference in structure and function is pivotal for individuals considering their long-term insurance needs, particularly those seeking both death benefit protection and a savings component.