Maryland Life and Health Insurance License Practice Exam

In a life insurance policy, what happens to cash value that accumulates?

1. It is immediately taxable upon accumulation

2. It can be used for loans against the policy

3. It is only accessible upon death

4. It decreases the death benefit

The correct answer is: It can be used for loans against the policy

Cash value in a life insurance policy builds over time and represents a portion of the policyholder's premium payments that is set aside as a savings component. This accumulated cash value can indeed be utilized by the policyholder to take out loans against the policy. This means the policyholder can borrow money, using the cash value as collateral, which can provide financial flexibility during their lifetime. The loan does not have to be repaid as long as the policy remains in force, but any unpaid loans will reduce the death benefit payable to beneficiaries upon the insured's death. The fact that cash value can be accessed through loans is an essential feature of whole life or universal life insurance policies, making option B the correct choice. In comparison, the other options do not accurately reflect what happens to the cash value accumulated in a life insurance policy. Immediate taxation on accumulation isn't applicable unless the cash value is withdrawn beyond certain limits, accessibility upon death pertains to beneficiaries rather than the policyholder, and cash value generally does not decrease the death benefit but rather may affect it if loans are outstanding at the time of the insured's death.