South Carolina Life Insurance Practice Exam

Which of the following insurance options would be considered a risk-sharing arrangement?

1. Straight Life

2. Whole Life

3. Term Life

4. Universal Life

The correct answer is: Straight Life

A straight life insurance policy is often viewed as a risk-sharing arrangement because it provides coverage for the insured's entire life, contingent upon the continued payment of premiums. Under this arrangement, the insurer pools the risks from many policyholders, which allows the company to pay out death benefits as needed while collecting premiums from all insured individuals. This system facilitates risk-sharing among policyholders, as premiums collected from healthier individuals support the payouts to those who may pass away earlier than expected. In contrast, other types of policies like whole life, term life, and universal life have different structures and features, including investment components or limited coverage periods that do not emphasize the same pooling effect inherent in a straight life policy. Whole life and universal life offer a death benefit along with a cash value component, thereby introducing elements of investment rather than purely risk-sharing. Term life is focused on providing coverage for a specific period without the accumulation of cash value, thereby limiting the risk-sharing benefit since it pays out only if the insured dies within that timeframe. Thus, the characteristic of risk-sharing is most clearly exemplified by straight life insurance.