Final answer:
A corridor adjustment occurs when an insurance company must remove excess cash value from a universal life insurance policy to maintain its status as life insurance. The company either raises the death benefit or refunds some cash to the policy owner. This process is part of managing the inflow and outflow of funds in an insurance company, which includes premiums, investments, claims, and operating expenses.
Step-by-step explanation:
When a universal life insurance policy accumulates an excessive cash value in relation to the face amount of the policy, the insurance company may engage in a practice known as a corridor adjustment. This is necessary to maintain the policy's status as life insurance rather than an investment under tax laws. If the cash value becomes too large, it can trigger the policy to become a Modified Endowment Contract (MEC), subjecting it to different tax rules. To prevent this, the insurer will either increase the death benefit or return some of the cash value to the policyowner
An insurance company generates money through premiums and investments, and the money flows out through claims, expenses, and other operating costs. Policyholders can often borrow against their policies, but this loan must be paid back with interest. Understanding how cash value and death benefits work together is crucial for managing a life insurance policy effectively.