Tennessee Insurance Practice Exam

What happens to the cash value of a reduced paid-up policy?

1. It is lost entirely

2. It remains static forever

3. It continues to grow

4. It decreases over time

The correct answer is: It continues to grow

In a reduced paid-up policy, the cash value continues to grow over time. This type of policy is created when a policyholder decides to stop making premium payments but chooses to use the policy's accumulated cash value to purchase a reduced paid-up life insurance policy. Although the face amount of the coverage is reduced, the policy will still have a cash value that typically continues to accumulate interest, making it grow over time. This option emphasizes the nature of the cash value in a whole life insurance policy, which is designed to provide both a death benefit and a cash accumulation feature. The cash value growth is generally consistent with the insurer's policy structure, which is meant to protect the policyholder's investment and offer accessible funds if needed in the future.