What can cause the cash value of a whole life policy to decrease?

What can cause the cash value of a whole life policy to decrease?

• A. Policyholder taking out a loan against the policy
• B. Reduction in annual premium payments
• C. Decreased market interest rates
• D. Policy lapse due to unpaid premiums

Answer: (A)

Taking out a loan against a whole life policy is a common action that can lead to a decrease in the cash value if the loan amount exceeds the premiums paid or the accumulated cash value. When a policyholder borrows against the cash value, they essentially reduce the amount of funds available in the policy. Although the policy remains in force, the outstanding loan amount incurs interest, which can further diminish the overall cash value if not repaid. Therefore, this decreases the policy's total cash value until the loan is paid back. In contrast, while a reduction in annual premium payments or decreased market interest rates can influence the policy's performance, they do not directly cause the cash value to decrease in the same immediate way that taking out a loan does. Additionally, if a policy lapses due to unpaid premiums, it typically results in the end of the policy itself rather than a gradual decrease in cash value, as the coverage will cease. Thus, a loan taken against the policy is the most direct cause for a decrease in cash value.

Taking out a loan against a whole life policy is a common action that can lead to a decrease in the cash value if the loan amount exceeds the premiums paid or the accumulated cash value. When a policyholder borrows against the cash value, they essentially reduce the amount of funds available in the policy. Although the policy remains in force, the outstanding loan amount incurs interest, which can further diminish the overall cash value if not repaid. Therefore, this decreases the policy's total cash value until the loan is paid back.

In contrast, while a reduction in annual premium payments or decreased market interest rates can influence the policy's performance, they do not directly cause the cash value to decrease in the same immediate way that taking out a loan does. Additionally, if a policy lapses due to unpaid premiums, it typically results in the end of the policy itself rather than a gradual decrease in cash value, as the coverage will cease. Thus, a loan taken against the policy is the most direct cause for a decrease in cash value.