Life & Health Insurance Exam (National Portion)Life InsuranceMedium
A life insurance policy states that if the insured dies during the policy term, the death benefit will be paid. However, if the insured survives the term, the policy's cash value, which has grown to equal the face amount, is paid to the policyowner. Which type of policy does this describe?
- AUniversal Life
- BEndowment Policy
- CWhole Life
- DTerm Life
Show answer & explanationAnswer & explanation
Correct answer: B. Endowment Policy
An Endowment policy is characterized by paying a death benefit if the insured dies within a specific term, or paying the face amount (which the cash value has grown to equal) to the policyowner if the insured is still alive at the end of the term.
Why the other options are wrong
- A. Universal Life policies are permanent, flexible policies that accumulate cash value, but the cash value does not necessarily equal the face amount at a specific 'term' end, nor is there a guaranteed payout of the face amount at a specific age if alive.
- C. Whole Life policies provide permanent coverage and pay a death benefit upon death, but the cash value does not typically equal the face amount until very old age (e.g., 100).
- D. Term Life policies expire without value if the insured outlives the term, and they do not accumulate cash value.
Endowment Policy
A life insurance policy that pays the face amount as a death benefit if the insured dies within a specified period, or pays the face amount to the policyowner if the insured is still alive at the end of that period.
- Combines insurance protection with a savings component.
- Cash value equals the face amount at the end of the endowment period.
- Less common today due to unfavorable tax treatment (MEC rules).
Memory trick: Endowment: A GIFT at the end, dead or alive.