South Carolina Insurance Practice Exam

An interest-sensitive life insurance policy owner may be able to withdraw the policy's cash value interest free. The provision that allows this is called?

1. Full Surrender

2. Policy Loan

3. Partial Surrender

4. Cash Withdrawal

The correct answer is: Partial Surrender

The correct choice is based on the nature of interest-sensitive life insurance policies, which often accumulate cash value that the policyholder can access. A partial surrender allows the policyholder to withdraw a portion of the accumulated cash value from the policy while keeping the policy in force. This withdrawal is generally allowed without incurring immediate tax consequences, as long as it does not exceed the amount of premiums paid into the policy. This choice is particularly important because it provides flexibility for the policyholder. The ability to withdraw cash value interest-free can serve various financial needs without fully surrendering the policy or taking a loan against it, which could incur interest or other terms. Other options involve different conditions. Full surrender means completely terminating the policy and withdrawing all cash value, which may trigger taxation on the gains. A policy loan refers to borrowing against the cash value, typically subject to interest, and may ultimately affect the death benefit if not repaid. Cash withdrawal is a broad term that could mean different things but doesn't specifically capture the nuances of not affecting the policy's overall status while allowing an interest-free withdrawal. Hence, partial surrender is the most accurate term for the context provided.