Texas Life Agent Practice Exam

Which of the following best describes a whole life insurance policy?

1. It accumulates cash value and provides lifelong coverage.

2. It provides coverage for a limited number of years only.

3. It has no cash value component.

4. It is primarily aimed at younger and healthy individuals.

The correct answer is: It accumulates cash value and provides lifelong coverage.

A whole life insurance policy is best described by the option indicating that it accumulates cash value and provides lifelong coverage. This type of policy is designed to last for the policyholder's entire life, as long as the premiums are paid. One of its defining features is the cash value component, which grows over time on a tax-deferred basis. This means that a portion of the premium payments goes into a savings account, allowing the policy to build cash value that the policyholder can borrow against or withdraw under certain conditions. In contrast, the other options do not accurately represent whole life insurance. Limited coverage for a set period is characteristic of term life insurance, which typically does not facilitate cash value accumulation. Policies with no cash value are generally whole life insurance, which can be confusing; instead, those would be relevant for term policies or specific types of limited-benefit plans. Lastly, while whole life insurance can be purchased by individuals of various ages and health statuses, it is not exclusively aimed at younger and healthy individuals—this characteristic is more fitting to certain other forms of life insurance. Understanding these concepts is crucial for those preparing to become licensed life insurance agents in Texas, as it highlights the fundamental differences between various types of life insurance policies.