Tennessee Insurance Practice Exam

In an Interest Sensitive Whole Life policy, how are cash values determined?

1. Based on the policyholder's age

2. By the insured's health status

3. According to changing interest rates

4. Fixed at the time of the policy purchase

The correct answer is: According to changing interest rates

In an Interest Sensitive Whole Life policy, cash values are determined according to changing interest rates. This type of policy offers more flexibility compared to traditional whole life insurance by allowing the cash value to accumulate based on a specific interest rate that may fluctuate over time. The insurer typically provides a minimum guaranteed interest rate, but the actual rate can vary based on market conditions. As interest rates rise, the cash value grows at a higher rate, benefiting policyholders with increased equity in their policies. Conversely, if interest rates decline, the growth may slow down. This adaptability is a fundamental feature of Interest Sensitive Whole Life policies, making them distinct from fixed cash value policies, where cash values are determined at the time of policy purchase and do not change based on market conditions. The other options, such as factors like the policyholder's age or health status, may impact underwriting or premium calculations but do not fundamentally determine how cash values are influenced in this type of policy. The key takeaway is that cash values fluctuate with prevailing interest rates, offering potential for growth that aligns with broader economic trends.