South Carolina Life Insurance Practice Exam

What happens when the cash value of a whole life policy is less than the total premiums paid?

1. The policy lapses immediately

2. The policy offers a surrender value

3. The policy can still provide death benefits

4. The policy is voided

The correct answer is: The policy can still provide death benefits

When the cash value of a whole life policy is less than the total premiums paid, the policy can still provide death benefits. Whole life insurance is designed to offer lifelong coverage, and the death benefit is guaranteed as long as the premiums are paid. Even if the cash value is lower than the total premiums, the insurer is still obligated to pay the death benefit to the beneficiaries upon the insured's passing. The cash value component simply represents a savings element that accumulates over time, but it does not diminish the contractual obligation of the insurer to provide the death benefit. This feature is one of the key aspects of whole life policies, distinguishing them from term policies, which only provide death benefits without any cash accumulation. This situation underscores the nature of whole life insurance, where the death benefit is always available, regardless of the cash surrender value. The cash value growth may be slower initially, but policyholders can still rely on the death benefit protection that the policy affords.