The correct answer is “Universal Life.” Universal Life insurance policies combine term insurance with an investment element, offering both a death benefit and a cash value component.

Let’s provide a detailed explanation of why “Universal Life” is the correct answer and why the other options (Increasing Term Life, Decreasing Term Life, and Graded Life) do not combine term insurance with an investment element.

Correct Answer: Universal Life Insurance

Universal Life insurance is a type of permanent life insurance that combines term insurance with an investment or cash value component. Here’s why Universal Life insurance is the correct answer:

1. Term Insurance Component:

Universal Life insurance includes a term insurance component. This component provides a death benefit, which pays out to the beneficiary in the event of the policyholder’s death. This death benefit is similar to the coverage provided by traditional term life insurance.

2. Cash Value Element:

What distinguishes Universal Life from traditional term insurance is the cash value component. Universal Life policies allow policyholders to allocate a portion of their premium payments to a cash value account. This cash value account accumulates over time, often with the opportunity to earn interest or investment returns.

3. Flexibility:

Universal Life policies provide flexibility in premium payments, which can be adjusted within certain limits. Policyholders can pay higher premiums to increase the cash value more rapidly, or they can reduce or skip premiums during financially challenging times.

4. Access to Cash Value:

Policyholders can access the cash value during their lifetime through withdrawals or loans. This can be used for various purposes, such as supplementing retirement income or covering financial emergencies.

5. Investment Options:

Some Universal Life policies allow policyholders to invest the cash value in different investment options, such as fixed accounts, variable accounts, or indexed accounts. The performance of these investments can influence the cash value growth.

6. Cost of Insurance:

Universal Life policies still have a cost of insurance component, similar to term insurance. This cost covers the risk of providing the death benefit and varies based on the policyholder’s age and health. Any excess premium payments beyond the cost of insurance go toward the cash value.

Incorrect Options and Explanations:

Increasing Term Life:

Increasing Term Life insurance is a type of term insurance where the death benefit increases over time, often to keep pace with inflation. It does not have a cash value component or an investment element.

Decreasing Term Life:

Decreasing Term Life insurance is a type of term insurance where the death benefit decreases over time, typically to align with a decreasing financial obligation (e.g., a mortgage). It does not include a cash value or investment element.

Graded Life:

Graded Life insurance is a type of whole life insurance that is typically offered to individuals who may not qualify for standard life insurance due to health issues. It does not combine term insurance with an investment element. Graded Life policies often have a waiting period, and the death benefit may be limited during the early years of the policy.

In summary, Universal Life insurance is the correct answer because it combines term insurance with an investment element, providing both a death benefit and a cash value component that policyholders can access and potentially invest.

The other options mentioned—Increasing Term Life, Decreasing Term Life, and Graded Life—are types of life insurance policies that do not include the investment and cash value features characteristic of Universal Life insurance.