AD Banker Comprehensive Practice Exam

What adjustments are typically made to a cash value account in a universal life policy?

1. Cost of insurance charged and current interest credited

2. Cost of insurance credited and current interest charged

3. Guaranteed interest credited with favorable investment

4. Premiums and guaranteed interest charged

The correct answer is: Cost of insurance charged and current interest credited

In a universal life policy, the cash value account is adjusted by accounting for both the cost of insurance and any interest earned. Each month, the cost of insurance is deducted from the policy's cash value to cover the risk of mortality. This cost is based on the insured's age and health and varies as these factors change. Simultaneously, the cash value account earns interest, which is credited based on the insurer's current interest rate. This rate may vary, reflecting changes in the market, but it generally offers policyholders a rate that may exceed traditional whole life policies. This dual process ensures that the cash value account reflects the ongoing costs of insurance while also benefiting from interest accrual, thus enhancing the account's growth potential over time. Combining these factors provides a balance between risk management and investment growth, characteristic of universal life insurance policies.