Colorado Life Producer License Practice Test

How is the payable death benefit calculated when there are withdrawals?

1. Face amount divided by total premiums paid

2. Face amount minus the amount withdrawn and lost interest earnings

3. Face amount minus any claims submitted in prior years

4. Total premiums paid plus accrued interest

The correct answer is: Face amount minus the amount withdrawn and lost interest earnings

The calculation of a payable death benefit in the context of a life insurance policy with withdrawals involves determining how those withdrawals impact the face amount of the policy. The correct answer recognizes that any amount withdrawn from the policy needs to be deducted from the face amount, as it represents the funds that the policyholder has taken out of the policy, reducing the overall risk to the insurer. When withdrawals occur, not only is the face amount of the policy reduced by the amount withdrawn, but there is also a consideration of the lost interest earnings on those withdrawn amounts. This is because the insurer would have been able to earn interest on the premiums paid in, and by allowing a withdrawal, the potential interest that would have accrued on that amount is also effectively 'lost' to the policyholder. Thus, the final death benefit payable is calculated as the original face amount minus the total amount withdrawn, factoring in the lost earning potential. This understanding is crucial because it reflects the fundamental principle of insurable interest and the financial mechanism of life insurance policies, where maintaining a balance between the premiums paid, withdrawals, and accrued interest is essential for accurate death benefit calculations. The other options do not adequately reflect this relationship, lacking the necessary adjustments for withdrawals and their financial implications.