Texas Life Agent Practice Exam

Which of the following is the main purpose of a life insurance policy?

1. Debt elimination

2. Income replacement

3. Investment growth

4. Tax sheltering

The correct answer is: Income replacement

The primary purpose of a life insurance policy is income replacement. This is crucial because life insurance is designed to provide financial security to the beneficiaries after the policyholder's death. If the insured individual passes away, the life insurance payout serves to replace the income that the deceased would have contributed to the family or dependents. This financial support helps ensure that loved ones can maintain their standard of living, cover living expenses, settle outstanding debts, and save for future needs. While debt elimination, investment growth, and tax sheltering can be potential benefits or features associated with certain life insurance products, they do not capture the main intent of life insurance as comprehensively as income replacement does. Debts may indeed be settled through the death benefit, but the core function of life insurance centers around providing ongoing financial support to those left behind.