Question 87

Cash value grows on a tax-deferred basis.

In a traditional Whole Life policy, the cash value accumulates over time and does so on a tax-deferred basis, meaning that policyholders do not have to pay taxes on the growth of the cash value until it is withdrawn.

A) Grows on a tax-deferred basis.

This option is correct because the cash value of a Whole Life policy indeed grows without immediate tax implications, allowing the policyholder to benefit from compound growth over time.

B) Is never guaranteed.

This option is incorrect as the cash value in a Whole Life policy is guaranteed to grow, albeit at a predetermined rate set by the insurance company, which is a fundamental characteristic of such policies.

C) Is invested at the direction of the policyowner.

This option is incorrect because the cash value in a Whole Life policy is managed by the insurance company, not directly by the policyowner. Policyholders do not have discretion over how their cash value is invested.

D) Is maintained in the separate account.

This option is incorrect since Whole Life policies do not operate through separate accounts; the cash value is part of the overall policy and is managed by the insurer as part of their general account.

Conclusion

The correct answer is A because the cash value of a Whole Life policy grows on a tax-deferred basis, which is a fundamental benefit for policyholders. All other options either misrepresent the characteristics of the cash value or confuse it with features of different types of insurance policies.