Tennessee Insurance Practice Exam

Which of the following statements is true about a whole life policy?

1. It offers limited premium payment terms

2. Cash value may be borrowed against

3. It does not accumulate any cash value

4. It is primarily for term-based coverage

The correct answer is: Cash value may be borrowed against

A whole life policy is designed to provide coverage for the entire lifetime of the insured, as long as premiums are paid. One of the key features of whole life insurance is that it accumulates cash value over time. This cash value component is an important aspect of whole life policies because it grows at a guaranteed rate and can be borrowed against by the policyholder. Borrowing against the cash value can provide financial flexibility, allowing the insured to access funds for various needs while keeping the policy in force. In contrast, certain policies may have limited premium payment terms, but whole life insurance is more characteristic of level premiums throughout its duration. Whole life policies do accumulate cash value, which is a fundamental difference from term life insurance, which provides coverage only for a specified term and does not build cash value. Therefore, saying that a whole life policy does not accumulate cash value misrepresents one of its primary features. Lastly, whole life insurance is not primarily for term-based coverage; it is established to provide permanent coverage for the insured's entire life. This reinforces the importance of the cash value aspect, as it distinguishes whole life from term life insurance.