Tennessee Insurance Practice Exam

How does the cash value of a Universal Life policy change?

1. It remains constant throughout the policy

2. It depends on the premiums paid

3. It varies according to interest rates

4. It decreases as the insured ages

The correct answer is: It varies according to interest rates

The cash value of a Universal Life policy is designed to accumulate over time and can vary based on several factors, with interest rates playing a significant role. Universal Life policies typically have an investment component that allows the cash value to grow based on credited interest rates set by the insurance company. These rates can change regularly, which means that the cash value may increase or decrease depending on the market fluctuations and the insurer's performance. In addition to interest rates, the cash value can also be influenced by other factors, such as the amount of premium payments made and any policy fees or costs deducted. However, the central aspect that causes variability in the cash value is indeed the interest rates, which can be tied to a benchmark or the general economic climate. Therefore, the statement that the cash value varies according to interest rates reflects a fundamental characteristic of how Universal Life policies function.