Which of the following is an advantage of whole life insurance over term life insurance?
a- it accumulates a cash value
b- its rates decrease over time
c- it must be renewed after a set period of years
d- it has a higher payout than term life insurance
a- it accumulates a cash value
The advantage of whole life insurance over term life insurance is that it accumulates a cash value (option a). Whole life insurance policies have a cash value component that grows over time. This cash value can be accessed by the policyholder through loans or withdrawals, offering a savings element in addition to the death benefit. Term life insurance, on the other hand, does not accumulate a cash value. Therefore, options b, c, and d are incorrect.
The advantage of whole life insurance over term life insurance is that it accumulates a cash value. To arrive at this answer, let's compare the given options:
a) It accumulates a cash value: This is correct. Whole life insurance policies have a cash value component, which means that over time, a portion of the premiums paid will be allocated to a cash value account, which can grow tax-deferred and be withdrawn or borrowed against. This feature is not present in term life insurance.
b) Its rates decrease over time: This is incorrect. With whole life insurance, the premiums tend to remain fixed throughout the life of the policy. In contrast, term life insurance premiums may increase over time, especially when the policy is renewed.
c) It must be renewed after a set period of years: This is incorrect. Whole life insurance is a type of permanent life insurance, which means it does not need to be renewed like term life insurance. It remains in force as long as the premiums are paid.
d) It has a higher payout than term life insurance: This is incorrect. The payout or death benefit of a life insurance policy is typically determined by the policy's face value and is not specific to whether it is whole or term life insurance. Both types of policies can have varying payout amounts depending on the coverage selected.
Therefore, the correct answer is a) it accumulates a cash value.