Rhode Island Life Insurance Practice Exam

What option allows a whole life insurance policyowner to sell their policy for an amount greater than its cash value?

1. Policy loan

2. Life settlement contract

3. Cash surrender value

4. Beneficiary assignment

The correct answer is: Life settlement contract

The option that allows a whole life insurance policyowner to sell their policy for an amount greater than its cash value is the life settlement contract. In a life settlement, the policyholder sells their existing life insurance policy to a third party for a lump sum payment that is typically higher than the policy’s cash surrender value but lower than the death benefit. This can provide financial relief to the policyholder, especially if they no longer need the insurance, are unable to pay premiums, or simply want to convert the policy into cash. A policy loan allows the policyowner to borrow against the cash value of their whole life insurance but does not involve selling the policy. The cash surrender value is the amount the policyowner receives if they choose to cancel the policy, which is almost always less than the death benefit. Beneficiary assignment pertains to designating someone to receive the death benefit upon the policyowner's death and has no relevance to selling the policy. Thus, the life settlement contract uniquely allows for a transaction that capitalizes on the policy’s value beyond just its cash surrender value.