California Life and Health Insurance Practice Exam

When an accidental death benefit is added to a whole life policy, how does it affect the policy's cash value?

1. Increases the cash value

2. Decreases the cash value

3. Policy's cash value is not affected

4. Reduces the death benefit

The correct answer is: Policy's cash value is not affected

When an accidental death benefit is added to a whole life policy, it does not affect the policy's cash value. The cash value of a whole life insurance policy is primarily determined by the premiums paid, the insurer's interest on those premiums, and the policy's non-forfeiture options. Adding an accidental death benefit creates an additional layer of coverage, which provides a higher payout in the event of death due to an accident, but it does not change the cash value accumulation. The cash value grows based on the contract terms and operates independently of any riders or additional benefits such as the accidental death benefit. Therefore, the policy's cash value remains unchanged whether or not this rider is included. Understanding this distinction is essential, as it highlights how supplemental benefits can enhance a policy's coverage without impacting the underlying cash value component.