Rhode Island Life Insurance Practice Exam

Which life insurance generally provides maximum death benefit at lower initial costs but comes with the risk of increasing premiums?

1. Whole life

2. Universal life

3. Term life

4. Variable universal life

The correct answer is: Universal life

The choice of universal life insurance provides maximum death benefits at lower initial costs while also presenting the risk of increasing premiums. This type of insurance is designed with a flexible premium structure, allowing policyholders to adjust both the amount and frequency of their premium payments. In the initial years of the policy, premiums can be relatively low compared to whole life insurance, making it an attractive option for those who prioritize lower upfront costs. However, as the policyholder ages, the cost associated with the life insurance protection portion can increase due to factors such as mortality risk and changes in the interest rates that affect the cash accumulation component of the policy. This means that while the initial costs may be lower, there is a risk that premiums could increase significantly in later years, potentially making the policy more costly over time. Whole life insurance, on the other hand, provides fixed premiums and guaranteed death benefits, resulting in consistent costs but generally higher initial premiums. Term life is typically the most affordable option for pure death benefit protection but does not build cash value, making it less relevant in this context. Variable universal life combines investment flexibility with the potential for market-based returns but does not inherently focus on lower initial costs as a primary feature.