Colorado Life Producer License Practice Test

What is the characteristic of a single premium policy?

1. It has a flexible payment schedule

2. It generates immediate cash value

3. It allows for annual renewals

4. It is only available for term insurance

The correct answer is: It generates immediate cash value

A single premium policy is characterized primarily by generating immediate cash value because it requires a one-time upfront payment, often leading to immediate coverage. This immediate cash value arises from the lump-sum investment made at the start of the policy, which is allocated towards both the insurance coverage and the cash value component. In contrast, flexible payment schedules, annual renewals, and availability strictly to term insurance do not hold true for single premium policies. Flexible payment schedules are associated with other types of policies where premiums can be adjusted or paid over time. Annual renewals pertain to policies that are short-term in nature, such as yearly renewable term insurance, but a single premium policy has a fixed initial outlay. Additionally, single premium policies are not restricted to term insurance; they can apply to whole life or universal life policies, which also build cash value over time. Thus, the defining characteristic of generating immediate cash value is what solidifies the correct answer.