Rhode Island Life Insurance Practice Exam

What type of policy provides coverage that can change based on investment performance?

1. Whole life policy

2. Variable life policy

3. Term life policy

4. Universal life policy

The correct answer is: Variable life policy

A variable life policy provides coverage that can change based on investment performance. This type of policy combines life insurance protection with an investment component, allowing the policyholder to allocate a portion of the premium payments to various investment options, such as stocks, bonds, or mutual funds. The cash value and death benefit of a variable life policy can fluctuate depending on the performance of these investments, allowing for the potential of increased growth compared to traditional policies. This flexibility is a key feature of variable life insurance; policyholders can adjust their investment allocations and have control over how their premiums are invested. Unlike whole life policies, which have a fixed premium and guaranteed cash value growth, or term life policies that provide coverage for a specific timeframe without any cash value, variable life policies present an opportunity for growth that is influenced by market conditions. Universal life policies also allow for some flexibility in premium payments and death benefits, but their cash value growth is generally tied to a fixed interest rate rather than the performance of separate investment accounts.