Which statement is TRUE regarding a Variable Whole Life policy?
The Correct Answer Is:
a. A minimum guaranteed Death benefit is provided
A Variable Whole Life (VWL) policy is a type of permanent life insurance that has some distinct characteristics. The correct answer, “A minimum guaranteed Death benefit is provided,” is true for Variable Whole Life policies.
Correct Answer Explanation
Let’s explore why this answer is correct and then examine why the other options are not accurate.
a. A minimum guaranteed Death benefit is provided:
Variable Whole Life insurance, as the name suggests, offers policyholders a degree of flexibility and variability, primarily in the cash value component. However, it does provide a minimum guaranteed death benefit.
This means that regardless of the performance of the policy’s cash value, the policyholder’s beneficiaries are guaranteed to receive a certain minimum payout upon the insured person’s death. This feature provides a level of financial security to the policyholder and their loved ones.
Furthermore, the minimum guaranteed death benefit serves as a foundational pillar of financial planning, allowing policyholders to incorporate it into their overall estate and legacy planning strategies.
This guaranteed payout provides a solid base upon which individuals can build their financial future, enabling them to make informed decisions about their assets, investments, and overall financial well-being.
Now, let’s address why the other options are not correct:
b. It is a combination of an Endowment and an Increasing Term policy:
This statement is not accurate. A Variable Whole Life policy is a distinct type of life insurance and is not a combination of an Endowment policy (which typically matures at a specific time with a lump-sum payout) and an Increasing Term policy (which provides a death benefit that increases over time).
While Variable Whole Life insurance has certain investment and cash value elements, it is fundamentally different from these other types of policies.
c. Its premiums and benefits are variable:
This statement is partially accurate but lacks clarity. In a Variable Whole Life policy, the cash value component can fluctuate based on the performance of underlying investments, such as mutual funds. The policyholder has the opportunity to allocate their premium payments into different investment options.
However, there are certain guarantees and minimums associated with the death benefit, as discussed in the correct answer. So, while the cash value is variable, the death benefit has a minimum guaranteed value.
d. It has guaranteed dividends:
Variable Whole Life policies do not typically provide guaranteed dividends. Guaranteed dividends are a feature of traditional whole life insurance, where the insurer shares its profits with policyholders in the form of dividends.
Variable Whole Life policies, being more tied to the performance of investments, do not have the same dividend structure. Instead, they offer the potential for policyholders to earn investment returns on the cash value component, which is linked to the performance of the underlying investments.
In summary, a Variable Whole Life policy is a unique form of permanent life insurance that combines an insurance component with an investment component.
While it offers flexibility and variability in the cash value, it also provides a minimum guaranteed death benefit, ensuring that the policyholder’s beneficiaries will receive a specified payout upon the insured person’s death. This guarantee sets it apart from other forms of life insurance and makes option (a) the correct answer.