Final answer:
Variable life insurance is a policy that ties the cash value's investment to the stock market, providing a potential for growth but also involving risk. Policyholders may also borrow against this cash value. Understanding life insurance is important for financial planning.
Step-by-step explanation:
The type of life insurance that the student is asking about, where the death benefit can be based on the investment of cash values in the stock market, is known as variable life insurance. This kind of policy combines the protective benefits of life insurance with the investment potential of the stock market. Essentially, part of the premiums paid into a variable life insurance policy are invested in various accounts linked to equities, which can provide a potential for growth in the cash value of the policy. This cash value can then be used by the policyholder during their lifetime. However, it's important to caution that investing in the stock market involves risks, including the potential loss of principal.
Life insurance companies often accumulate significant cash reserves through premium payments. Policyholders may borrow against the cash value of their life insurance policies, although these loans must be repaid with interest to prevent reduction of the policy's death benefit.
Understanding the different types of insurance and how they work, including health insurance, car insurance, house or renter's insurance, and life insurance, is crucial for individuals to make informed decisions about their financial protection strategies.