Maryland Life and Health Insurance License Practice Exam

What does level premium permanent insurance gradually accumulate over time?

1. A reserve equal to the face amount of the policy

2. The total premiums paid over the life of the policy

3. Interest to enhance the death benefit

4. A cash surrender value

The correct answer is: A reserve equal to the face amount of the policy

The correct answer is that level premium permanent insurance gradually accumulates a cash surrender value over time. This type of insurance includes a savings or investment component, which allows policyholders to build value as they pay their premiums. As premiums are paid, a portion goes toward the cost of insurance, while another portion accumulates as cash value. This cash value is crucial because it offers the policyholder flexibility; they can borrow against it, withdraw funds, or even use it to help pay premiums. Over time, the cash surrender value can grow, depending on the policy structure and the insurer's performance of the underlying investments. The first option, which discusses a reserve, refers to a broader concept where insurance companies maintain reserves to cover future claims, rather than focusing on the accumulation aspect typical for the policyholder. Meanwhile, the total premiums paid refer to the overall amount the policyholder puts into the policy, but this does not necessarily reflect the savings or investment component as cash value does. Interest enhancing the death benefit would relate to how the policy performs and could affect the final payout, but it doesn’t directly link to the concept of accumulating cash value in the policy.