Tennessee Insurance Practice Exam

What typically happens when a Whole Life policyholder passes away with an active policy?

1. The insurer reclaims the policy value

2. Beneficiaries receive the cash value

3. Beneficiaries receive the death benefit

4. The policy lapses with no payout

The correct answer is: Beneficiaries receive the death benefit

In the case of a Whole Life policyholder passing away while their policy is active, the beneficiaries of the policy are entitled to receive the death benefit. This is the primary function of a Whole Life insurance policy: to provide financial security to the policyholder's named beneficiaries upon their death. The death benefit is usually a predetermined amount specified in the policy at the time of purchase, and it is generally paid out tax-free to the beneficiaries. The cash value associated with the Whole Life policy builds over time, but it does not directly go to the beneficiaries upon the insured's death. Instead, the death benefit is paid out regardless of the cash value that might have accumulated, ensuring that the beneficiaries receive a stated sum to help with expenses such as funeral costs, debts, or to maintain their standard of living. Thus, when the policyholder dies, the death benefit represents the insurer's obligation to the beneficiaries, fulfilling the purpose of the Whole Life policy in providing long-term financial assurance and support.