Question

What happens when the cash value of a life insurance policy equals the face value?

a. Taxes must be paid on the interest accumulation.
b. Premiums must be increased so the policy does not become a MEC.
c. The policy endows.
d. The policy is void.

Answer 1

The policy endows when the cash value of a life insurance policy equals the face value, meaning the policy has matured and the insurance company will pay out the face value to the policyholder.

Step-by-step explanation:

When the cash value of a life insurance policy equals the face value of the policy, option 'c' occurs: The policy endows. This signifies that the insurance policy has matured, and the insurance company is obligated to pay out the face value to the policyholder. At this point, the policyholder typically has various options, including receiving the endowment as a lump sum or reinvesting it into an annuity for a periodic stream of payments.

Crucially, when a life insurance policy endows, it does not become void; rather, it completes its intended financial lifecycle by reaching the specified maturation date. Premium payments are no longer required, and the policyholder is entitled to the full benefits of the policy. This outcome represents a successful realization of the policy's purpose, providing financial security or a payout to the policyholder as planned.