Advanced Diploma of Financial Planning (ADFP) Practice Test

Does a term life policy provide a tax-deferred cash value buildup?

1. Yes, it provides significant cash value

2. No, it has no cash value feature

3. Yes, but only after 10 years

4. No, it is not tax-deferred

The correct answer is: No, it has no cash value feature

A term life insurance policy is specifically designed to provide coverage for a specified period, usually ranging from one to thirty years, and pays a death benefit to the beneficiary if the insured passes away during that term. The primary intention of term life insurance is to offer financial protection rather than an investment component. One key characteristic of term life insurance is that it does not accumulate cash value like whole life or permanent insurance policies do. This means that policyholders do not have any cash value buildup throughout the term of the policy. Upon the expiration of the policy term, if the insured has not passed away, there is no benefit or cash surrender value available; thus, the policy simply ends without providing any financial return or value beyond the death benefit during the active period. In contrast, other types of life insurance, such as whole life, provide a cash value component that can grow over time and offers tax advantages. In the case of term insurance, there are no such benefits, confirming that it indeed does not have a cash value feature at any point during or after the term.