AD Banker Comprehensive Practice Exam

In the absence of specific instructions, what happens to the cash values when a permanent policy lapses?

1. They are forfeited by the insured

2. They are transferred to a different policy

3. They may be used to purchase paid up insurance

4. They are automatically rolled into a new policy

The correct answer is: They may be used to purchase paid up insurance

When a permanent policy lapses, the cash values accumulated in the policy do not simply disappear. Instead, one of the options for the insured is that these cash values can be utilized to purchase paid-up insurance. This means that the insured can take the cash value and use it to buy a reduced amount of permanent insurance that requires no further premium payments. This approach is beneficial for policyholders, as it allows them to retain some level of insurance coverage even after the original policy has lapsed. The conversion to paid-up insurance is often a default option for many permanent life insurance policies, ensuring that the insured can maintain some financial protection without ongoing premium obligations. Other options, like forfeiture of cash values or automatic transfers to different or new policies, do not apply in this scenario. Furthermore, the concept of automatically rolling cash values into a new policy is not standard practice in life insurance; typically, the policyholder must explicitly apply for a new policy or choose how to handle the existing cash value.