Term insurance has which of the following characteristics?
a) Expires at the end of the policy period
b) Builds cash value
c) Has nonforfeiture options
d) Endows at the end of the policy period
The Correct Answer and Explanation is:
The correct answer is a) Expires at the end of the policy period.
Explanation:
Term insurance is a type of life insurance that provides coverage for a specified period, or term, which can range from one year to several decades. Unlike whole life or universal life insurance, term insurance does not build cash value and is purely designed to provide a death benefit. Here’s a closer look at the characteristics mentioned in the question:
- Expires at the end of the policy period (a): This is the fundamental characteristic of term insurance. It is designed to provide financial protection for a predetermined period. If the insured individual passes away within that term, the beneficiaries receive the death benefit. However, if the term expires and the insured is still alive, the coverage ends, and no benefit is paid.
- Builds cash value (b): This characteristic is incorrect for term insurance. Unlike whole life insurance, which accumulates cash value over time, term insurance does not accumulate any cash value. The premiums paid for term insurance cover the cost of the death benefit only and do not contribute to a savings or investment component.
- Has nonforfeiture options (c): Nonforfeiture options are features found in permanent life insurance policies, allowing policyholders to receive benefits or convert their policy if they stop paying premiums. Since term insurance is temporary and has no cash value, it does not include nonforfeiture options.
- Endows at the end of the policy period (d): Endowment refers to a life insurance policy that pays out either upon the insured’s death or after a specified period, at which point it matures and pays the cash value to the policyholder. Term insurance does not endow; it simply provides coverage for a specified period.
In summary, term insurance is a straightforward and cost-effective option for those seeking temporary life insurance coverage without the additional features of permanent life policies. Its main attribute is that it expires at the end of the policy term without any cash value accumulation.