South Carolina Life Insurance Practice Exam

What is the primary risk associated with term life insurance?

1. Premium Rates Increase Significantly

2. No Cash Value Accumulates

3. Limited Coverage Period

4. Coverage is Terminated After a Certain Age

The correct answer is: No Cash Value Accumulates

The primary risk associated with term life insurance is that no cash value accumulates. Term life insurance is designed to provide coverage for a specified period, typically ranging from one to thirty years, and if the insured individual passes away during that term, the beneficiaries receive the policy’s death benefit. However, unlike whole life or universal life policies, term life does not build any cash value over time, which means there is no savings or investment component associated with it. This lack of cash value can be seen as a risk for policyholders because if they outlive the term of the insurance, they will not receive any payout and have no monetary benefit built up from the premiums they’ve paid. The financial investment made in term insurance essentially vanishes if the insured survives past the policy's expiration date, leading some to view this as a disadvantage. In contrast, other aspects like premium rate increases, limited coverage periods, and age-related coverage termination carry their own implications, but the absence of cash value is a fundamental characteristic specific to term life insurance that significantly affects policyholders' long-term financial planning.