Which of the following actions is NOT possible with a Universal Life policy?
Policy’s cash value may be used to pay premiums
Premium payments may be made at unscheduled times
Premiums may be applied as a credit against income tax
Face amount may be adjusted
The correct answer and explanation is :
The correct answer is:
“Premiums may be applied as a credit against income tax.”
Explanation:
A Universal Life (UL) insurance policy is a type of permanent life insurance that offers flexibility in premium payments, death benefits, and cash value accumulation. However, while it provides numerous advantages, it does not allow policyholders to apply premiums as a credit against income tax.
Understanding the Incorrect Options:
- Policy’s cash value may be used to pay premiums:
- Universal Life insurance allows policyholders to use the accumulated cash value to cover premium payments. If there is sufficient cash value, the insurer can automatically deduct the cost of insurance and other fees from it, reducing or even eliminating the need for out-of-pocket premium payments.
- Premium payments may be made at unscheduled times:
- Unlike traditional whole life insurance, Universal Life insurance provides flexibility in premium payments. Policyholders can adjust the timing and amount of their contributions within certain limits set by the insurance company. This makes it more adaptable to changing financial situations.
- Face amount may be adjusted:
- One of the key features of a Universal Life policy is that the death benefit (face amount) can be adjusted. Policyholders can increase the face amount (subject to insurability requirements) or decrease it to better fit their coverage needs.
Why “Premiums may be applied as a credit against income tax” is the Correct Answer:
Life insurance premiums are generally not tax-deductible for personal policies. Unlike business expenses or certain retirement contributions, the IRS does not allow policyholders to claim premiums as a tax credit. While the cash value grows tax-deferred, and death benefits are typically tax-free for beneficiaries, policyholders cannot directly use premiums to reduce their taxable income.
Thus, the correct answer is that Universal Life insurance premiums cannot be applied as a credit against income tax.