Under an Interest Sensitive Whole Life policy,

Options:

premiums are determined by the policyowner
no cash value ever accrues
the policy normally renews every 10 years
cash values are determined by interest rates

The Correct Answer Is:

c. cash values are determined by interest rates

Explanation of why the correct answer is c. Cash values are determined by interest rates:

An Interest Sensitive Whole Life policy is a type of whole life insurance that offers policyholders the opportunity to earn interest on the cash value component of their policy. This interest rate is typically linked to prevailing market rates.

Here’s why option c is the correct statement:

i. Cash Values and Interest Rates:

In an Interest Sensitive Whole Life policy, the cash value grows over time based on the performance of the investments made by the insurance company. These investments often include bonds and other interest-sensitive instruments.

As such, the cash values are directly affected by changes in interest rates. When interest rates rise, the cash value of the policy tends to increase, and when they fall, the cash value tends to decrease.

ii. Flexibility in Premiums:

Unlike some other types of insurance policies, an Interest Sensitive Whole Life policy may offer flexibility in premium payments. Policyholders may have the option to adjust their premiums within certain limits, allowing them to adapt to changing financial circumstances.

iii. Renewal Terms:

The policy doesn’t necessarily renew every 10 years. This characteristic is more associated with renewable term life insurance, where the policyholder has the option to renew the coverage at the end of each term.

In an Interest Sensitive Whole Life policy, the coverage is intended to last the entire lifetime of the insured as long as premiums are paid, and there’s typically no need for renewal.

iv. Accrual of Cash Value:

Unlike the statement in option b, an Interest Sensitive Whole Life policy does accrue cash value over time. This cash value can be accessed by the policyholder through loans or withdrawals, providing a savings component in addition to the death benefit.

Explanation of why the other options are not correct:

a) Premiums are determined by the policyowner:

This statement is a general characteristic of many types of life insurance policies, including Interest Sensitive Whole Life. Policyholders typically have the flexibility to adjust their premium payments within certain limits. This feature is not unique to Interest Sensitive Whole Life policies and applies to various types of life insurance.

b) No cash value ever accrues:

This statement is fundamentally incorrect for an Interest Sensitive Whole Life policy. One of the distinguishing features of this type of policy is the accrual of cash value over time. As premiums are paid, a portion is allocated to a cash value account.

This cash value grows based on the performance of the underlying investments, which often include interest-sensitive instruments like bonds. Over time, the cash value can become a substantial component of the policy’s overall value.

d) The policy normally renews every 10 years:

This statement is more characteristic of renewable term life insurance, where the policyholder has the option to renew coverage at the end of each term. However, it is not applicable to an Interest Sensitive Whole Life policy.

The latter is designed to provide coverage for the entire lifetime of the insured, as long as premiums are paid. There is typically no need for renewal, and the policy does not have specific terms like those found in term insurance.

In summary, options a, b, and d do not accurately describe the features of an Interest Sensitive Whole Life policy. These options either describe characteristics that are common to various types of life insurance or provide information that contradicts the fundamental nature of an Interest Sensitive Whole Life policy.

The key distinguishing feature of an Interest Sensitive Whole Life policy is its ability to accrue cash value over time, with this cash value being directly affected by prevailing interest rates. This dynamic feature makes it a versatile form of life insurance that can respond to changes in the financial environment.

Related Posts

Author
Recent Posts

Smirti Bam

BBA Scholar

Management Notes

Under an Interest Sensitive Whole Life policy,