California Life and Health Insurance Practice Exam

A life insurance policy where the insured can choose where the cash value can be invested is called?

1. Whole life insurance

2. Term life insurance

3. Variable life insurance

4. Universal life insurance

The correct answer is: Variable life insurance

Variable life insurance is indeed a policy that allows the insured to make investment choices regarding the cash value component. This type of insurance combines life coverage with a flexible premium and an investment component. Unlike whole life insurance, which has a fixed premium and cash value growth based on a set interest rate, variable life insurance allows policyholders to allocate their cash value among various investment options, such as stocks, bonds, and mutual funds. Since the performance of these investments can lead to fluctuations in both the cash value and the death benefit, it gives the insured greater control and the potential for higher returns, but also comes with increased risk. This flexibility and investment choice are the key features that differentiate variable life insurance from other types of policies like term life, which provides only death benefit protection without any cash value, and universal life, which offers more flexibility in premium payments but not as extensive investment choices as variable life.