PSI Life Exam Practice Test

What does ordinary life insurance accumulate over time?

1. Cash value equal to market rates

2. Investment returns

3. A reserve equal to the face amount of the policy

4. Interest based on Federal rates

The correct answer is: A reserve equal to the face amount of the policy

Ordinary life insurance, often referred to as whole life insurance, is designed not only to provide a death benefit to beneficiaries but also to accumulate a cash value over time. This cash value component grows at a guaranteed rate, which is determined by the insurance company, and typically accumulates on a tax-deferred basis. The reserve equal to the face amount of the policy is critical to understanding how this product functions. As premiums are paid, a portion goes toward building this reserve, ensuring that the insurer can meet future obligations. It is important to clarify that while the cash value does grow, it does so based on specific interest rates set by the policy agreement rather than fluctuating market rates or federal rates. In contrast, the other options do not accurately describe the nature of cash value accumulation in ordinary life insurance. While investments can yield returns, the growth in cash value is not primarily categorized this way, but rather as a specific reserve determined by the contract. Thus, the emphasis on the reserve being equal to the face amount reflects the policy's financial obligations rather than fluctuating market conditions or external interest rates.