Oklahoma Life Producer Practice Exam

What happens to the cash value in a Universal Life policy when premiums are not paid?

1. It continues to grow at a guaranteed rate.

2. It decreases and can lead to policy lapse.

3. It converts to a fixed interest account.

4. It is unaffected by the payment status.

The correct answer is: It decreases and can lead to policy lapse.

In a Universal Life insurance policy, the cash value is directly impacted by the payment of premiums. When premiums are not paid, the policy may start drawing from its cash value to cover the cost of insurance and administrative fees, which can lead to a decrease in the cash value over time. If the premiums remain unpaid for an extended period and the cash value is depleted, the policy risks lapsing, meaning it would terminate and no longer provide coverage. This understanding emphasizes the importance of maintaining premium payments to keep the policy effective and ensure the cash value continues to serve as a beneficial financial resource, rather than diminishing or causing the policy to end. The other options do not accurately reflect the dynamics of cash value in relation to unpaid premiums in a Universal Life policy.