Which statement about a whole life policy is true?
The Correct Answer Is:
c. Cash value may be borrowed against
Correct Answer Explanation:
c. Cash value may be borrowed against:
Whole life insurance policies have a unique feature that builds cash value over time. This cash value is a portion of the premiums paid that the insurance company invests. Policyholders have the option to borrow against this cash value.
The loan is typically tax-free and carries a relatively low-interest rate compared to other types of loans. It’s important to note that if you do not repay the loan, it will be deducted from the death benefit, potentially reducing the amount your beneficiaries receive.
Here’s a more detailed explanation of why this statement is correct:
i. Accumulation of Cash Value:
When you pay premiums for a whole life insurance policy, a portion of those premiums goes towards building a cash value component. This cash value grows over time, often at a guaranteed minimum rate of return set by the insurance company. It acts as a sort of savings or investment component within the policy.
ii. Policyholder’s Access to Cash Value:
Unlike term life insurance, which does not accumulate cash value, a whole life policy allows the policyholder to access the cash value while the policy is still in force. This means that you can use the funds that have accumulated within the policy for various purposes.
iii. Low-Interest Loans:
When you borrow against the cash value of a whole life policy, the interest rate on the loan is typically lower compared to other types of loans you might get from a bank or financial institution. This can make it an attractive option for policyholders who need to access funds.
iv. Tax Advantages:
Loans taken against the cash value of a whole life policy are usually considered tax-free. This means that you don’t have to pay taxes on the borrowed amount. This is in contrast to other types of loans where you might be subject to income tax on the borrowed funds.
v. No Credit Checks or Qualifications:
When you borrow against the cash value of your policy, you don’t need to go through a credit check or provide evidence of financial need. The policy’s cash value acts as collateral for the loan.
vi. Flexibility in Repayment:
While it’s important to repay any loans taken against the policy to avoid reducing the death benefit, there is generally flexibility in how and when you repay the loan. You can choose to repay it in installments or pay it back in a lump sum when it’s more convenient for you.
vii. Preservation of the Death Benefit:
Even if you borrow against the cash value, the death benefit of the policy remains intact (up to the amount not borrowed). This means that your beneficiaries will still receive the full death benefit upon your passing, provided the loan is repaid or deducted from the payout.
In summary, being able to borrow against the cash value of a whole life insurance policy provides policyholders with a valuable financial tool.
It offers access to funds for various needs, often at favorable terms, while still preserving the security of the policy’s death benefit for beneficiaries. This feature adds to the versatility and long-term value of a whole life insurance policy.
Now, let’s go through the other options and explain why they are not accurate:
a. Beneficiary may be charged only with the consent of the premium payor:
This statement is not correct. Beneficiaries of a whole life insurance policy are typically not involved in the management of the policy. The premium payor, who is often the policyholder, has the authority to make decisions regarding the policy without needing the beneficiary’s consent.
The beneficiary’s role primarily comes into play after the policyholder’s death when they are entitled to the death benefit.
b. Death benefit can usually be adjusted:
This statement is not accurate. In a whole life insurance policy, the death benefit is usually fixed at the time the policy is purchased.
Unlike term life insurance, which may allow you to choose the death benefit amount, whole life policies offer a set, guaranteed death benefit that does not change as long as the policy remains in force. This stability is one of the key features of whole life insurance.
d. Premiums are flexible:
This statement is not correct when it comes to whole life insurance. Whole life insurance is a type of permanent life insurance that comes with fixed premiums. These premiums are determined at the time the policy is issued and generally remain the same throughout the life of the policy, as long as the policyholder continues to pay them.
The fixed premiums are one of the defining characteristics of whole life insurance, providing policyholders with predictability and stability.
In summary, the true statement about a whole life policy is that the cash value may be borrowed against, allowing policyholders to access funds while the policy is in force. The other options presented are not accurate because they do not reflect the characteristics of a typical whole life insurance policy.