AD Banker Comprehensive Practice Exam

What happens to the value of a whole life policy when the policyholder stops paying premiums?

1. The policy lapses immediately.

2. The policy continues until the cash value is exhausted.

3. The policy is converted to a term policy.

4. The cash value is paid to the policyholder.

The correct answer is: The policy continues until the cash value is exhausted.

When a policyholder stops paying premiums on a whole life policy, the policy typically continues to remain in force until the accumulated cash value is exhausted. Whole life policies have a cash value component that builds up over time, and this cash value can be used to cover the premiums owed. Therefore, if the policyholder fails to pay premiums, the insurance company will utilize the cash value to keep the policy active for as long as there are sufficient funds. This makes the whole life policy unique, as it allows for a certain level of flexibility and protection even in cases of non-payment, as long as cash value exists. This mechanism is crucial because it provides a buffer for policyholders who may encounter financial difficulties, preventing an immediate lapse of the policy. In contrast, if the cash value depletes entirely, the policy would then lapse. This is why understanding the implications of cash value in whole life insurance is key for both policyholders and insurance professionals.