Massachusetts State Life Insurance Practice Exam

What does the term "cash value" refer to in life insurance?

1. The amount payable upon death

2. The savings component of a permanent life insurance policy

3. The insurance company's profit margin

4. The total premium paid by the policyholder

The correct answer is: The savings component of a permanent life insurance policy

The term "cash value" refers specifically to the savings component of a permanent life insurance policy. This feature allows the policyholder to accumulate savings over time as they continue to pay premiums. A portion of each premium payment contributes to this cash value, which grows on a tax-deferred basis. The policyholder can access this cash value through loans, withdrawals, or in case of policy surrender, which provides flexibility and additional financial resources if needed. The other options do not accurately describe cash value. The amount payable upon death pertains to the death benefit of the life insurance policy, which is different from the cash value. The insurance company's profit margin is unrelated to the policyholder's cash value and involves the company's financial performance. The total premium paid by the policyholder also does not represent cash value; rather, it is the total amount the policyholder spends to maintain the policy, which includes portions allocated to the cash value, mortality risk, and administrative costs.