Tennessee Insurance Practice Exam

What provision allows a Whole Life policy to remain active if the premium payment is not made and there is sufficient cash value?

1. Automatic Policy Loan

2. Waiver of Premium

3. Extended Term

4. Settlement Option

The correct answer is: Automatic Policy Loan

The provision that allows a Whole Life policy to remain active even if the premium payment is not made, provided there is sufficient cash value, is known as the Automatic Policy Loan option. When a policyholder fails to make a premium payment, the insurer can automatically borrow the necessary funds from the policy's cash value to cover the premium due. This keeps the policy in force and ensures continued life insurance protection without requiring immediate out-of-pocket payment from the policyholder. The Automatic Policy Loan is particularly useful for individuals who may encounter temporary financial difficulties, as it helps to prevent a lapse in coverage. The amount borrowed is then deducted from the death benefit or cash value, and the policyholder will need to repay the loan with interest to restore the full value of the policy later. In contrast, other options like the Waiver of Premium allow for premium payments to be waived under specific circumstances, such as disability, rather than using the cash value to keep the policy active. Extended Term relates to converting the cash value into a term insurance policy instead of maintaining the original Whole Life policy. Settlement Options refer to how the death benefit is paid out after the insured's death and do not pertain to maintaining an active policy.