South Carolina Insurance Practice Exam

A life insurance policy that guarantees a minimum interest rate while allowing for higher earnings is called?

1. Whole life policy

2. Universal life

3. Term life policy

4. Variable life policy

The correct answer is: Universal life

The correct response identifies a universal life insurance policy, which is designed to offer flexibility and potential for growth in cash value based on market conditions. Universal life policies guarantee a minimum interest rate, ensuring that the policyholder's investment will earn a specified rate, even if market conditions are not favorable. This feature protects the policyholder from losses while also allowing for the opportunity to earn higher returns based on the performance of underlying investments linked to the policy. Importantly, universal life insurance also provides the policyholder with the ability to adjust premiums and death benefits, giving them greater control over their coverage and cash value growth. This flexibility is a key characteristic that distinguishes it from more rigid types of life insurance. In contrast, whole life policies typically offer fixed premiums and a guaranteed death benefit without the option for adjusting coverage or linking to investment performance, while term life policies provide only death benefit protection for a specified term without any cash value component. Variable life policies allow for variable investment options but carry risks that can impact the cash value negatively, unlike the guaranteed minimum feature of universal life.