Rhode Island Life Insurance Practice Exam

In an interest sensitive whole life policy, how are cash values determined?

1. By the insurer's discretion

2. By market performance

3. By interest rates

4. By the policyowner's contributions

The correct answer is: By interest rates

In an interest-sensitive whole life policy, cash values are primarily determined by interest rates. This type of policy is designed to provide a cash value component that can grow over time, and the growth is linked to current interest rates set by the insurance company. The insurer credits interest to the cash value based on these rates, which can fluctuate with market conditions, but they are not entirely dictated by market performance. The insurer typically uses a formula defined in the policy to calculate cash values based on the premiums paid and the prevailing interest rates. This approach balances stability and growth, giving policyholders the benefits of a traditional whole life policy while still allowing for potential increases in cash value as interest rates change. This mechanism ensures that the cash value remains responsive to economic conditions, ultimately benefiting the policyholder as the policy matures. Other factors such as policyowner contributions do play a role in the accumulation of cash values, but the pivotal element is the interest rates set by the insurer, making this choice the most accurate representation of how cash values are determined in interest-sensitive whole life policies.