Looking for the answer to the question below related to Management ?
Life insurance immediately creates an estate upon the death of an insured. Which of the following policies is characterized by a guaranteed minimum death benefit?
Options:
A) Universal Life B) Variable Life C) Fixed annuity D) Modified endowment contract |
The Correct Answer Is:
- B) Variable Life
Answer Explanation:
The correct answer is indeed B) Variable Life. Let’s delve into the details of why this is the case and why the other options are not correct.
Variable Life Insurance:
Variable life insurance is a type of permanent life insurance that offers a death benefit and a cash value component. What sets it apart is the investment component.
Policyholders have the opportunity to invest their cash value in various investment options, such as stocks, bonds, or mutual funds. The death benefit in a variable life policy is not fixed; instead, it varies based on the performance of the chosen investments.
Guaranteed Minimum Death Benefit:
While variable life insurance allows for investment in the market, it also offers a safeguard in the form of a guaranteed minimum death benefit. This means that even if the investments perform poorly, there is a guaranteed minimum amount that will be paid out to the beneficiaries upon the insured’s death.
This feature ensures that there will always be some level of financial protection for the insured’s loved ones, making it the correct answer to the question.
Why Other Options Are Not Correct:
A) Universal Life Insurance:
Universal life insurance is another type of permanent life insurance that includes a cash value component. However, unlike variable life insurance, the cash value growth in universal life is typically tied to a fixed or minimum interest rate set by the insurance company.
While universal life insurance policies offer flexibility in premium payments and death benefit amounts, they do not have a guaranteed minimum death benefit feature tied to investment performance. Therefore, option A is not the correct answer.
C) Fixed Annuity:
A fixed annuity is a financial product designed for retirement income. It is not a life insurance policy and does not create an estate upon the death of the insured.
Fixed annuities provide regular payments to the annuitant during their lifetime or for a specified period, but they do not pay a death benefit to beneficiaries upon the annuitant’s death. Therefore, option C is not the correct answer.
D) Modified Endowment Contract (MEC):
A Modified Endowment Contract (MEC) is a tax qualification that life insurance policies can acquire if they do not meet certain IRS guidelines regarding premiums and benefits. It does not characterize a specific type of life insurance policy but rather a tax status.
MECs do not guarantee a minimum death benefit; instead, they are subject to different tax treatment compared to non-MEC policies. Therefore, option D is not the correct answer.
In summary, the correct answer to the question is B) Variable Life Insurance. Variable life insurance policies provide a guaranteed minimum death benefit in addition to the potential for cash value growth through investments.
This guaranteed minimum death benefit ensures that beneficiaries will receive a certain payout upon the insured’s death, regardless of the performance of the policy’s investments. The other options, including Universal Life, Fixed Annuity, and Modified Endowment Contract, do not offer this specific feature, making them incorrect answers in this context.
It’s crucial for individuals to understand the features and benefits of different types of insurance policies to make informed decisions about their financial planning and protection needs.
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