South Carolina Insurance Practice Exam

What is the corridor in relation to a Universal Life insurance policy?

1. The period of time required before the policy matures

2. The gap between total death benefit and the policy's cash value

3. The amount of time a policyholder has to pay premiums

4. The percentage of policy value that is available for loans

The correct answer is: The gap between total death benefit and the policy's cash value

In the context of a Universal Life insurance policy, the corridor refers to the gap between the total death benefit and the policy's cash value. This concept is crucial as it aligns with how Universal Life policies are structured. Universal Life insurance combines a death benefit with a cash value component that grows over time. However, for the policy to remain classified as life insurance for taxation purposes, the death benefit must exceed the cash value by a certain margin. This gap, or corridor, is necessary to provide a legitimate death benefit while allowing the cash value to accumulate. If the cash value were to approach or exceed the death benefit, it could create potential tax implications, shifting the classification of the policy. Thus, the corridor serves as an essential measure to ensure that the policy maintains its integrity as a life insurance product while still allowing for the accumulation of cash value.