South Carolina Life Insurance Practice Exam

What happens to the cash value of a universal life policy upon the insured's death?

1. The cash value is forfeited

2. It is paid out as part of the death benefit

3. It is returned to the policyholder's estate

4. It is paid to the beneficiaries only

The correct answer is: It is paid out as part of the death benefit

In a universal life insurance policy, the cash value plays a unique role in the overall structure of the policy. When the insured passes away, the death benefit, which is the amount paid out to the beneficiaries, usually includes the cash value of the policy. This means that the cash value is integrated into the death benefit, enhancing the total amount that beneficiaries receive. By including the cash value as part of the death benefit, universal life insurance policies provide a combination of investment growth and life insurance protection. This feature distinguishes it from other types of insurance, where the cash value may not contribute to the death benefit or may be treated differently upon the insured's death. Thus, the correct understanding of this process reflects the nature of universal life policies and their intended purpose of providing both financial protection to beneficiaries and a savings component to the policyholder during their lifetime.