Colorado Life Producer License Practice Test

What happens to a whole life policy if the cash value exceeds the death benefit?

1. The policy retains its tax advantages

2. The policy is reclassified as a different type of insurance

3. All benefits will stop immediately

4. The insured must pay higher premiums

The correct answer is: The policy is reclassified as a different type of insurance

When the cash value of a whole life policy exceeds the death benefit, the policy retains its status as a whole life insurance without being reclassified. The cash value accumulation in a whole life policy is designed to grow over time, and it is allowed to exceed the death benefit without changing the nature of the policy. One crucial aspect of whole life insurance is that even as the cash value increases, the death benefit remains guaranteed and will still be paid out upon the insured's death. This means that the benefits do not suddenly stop or require higher premiums simply because the cash value has surpassed the death benefit. Moreover, whole life insurance maintains its tax advantages regardless of the relationship between cash value and death benefit. The growth of cash value is on a tax-deferred basis, and the death benefit is generally paid out income tax-free to beneficiaries. Overall, the policy's structure and its intended financial protection remain intact; therefore, it is incorrect to say it is reclassified or that benefits are stopped.