Utah Life Producer Practice Exam

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What does liquidity refer to in a life insurance policy?

Premium payments are non-refundable
The policy can be sold at any time
Cash values can be borrowed at any time
Investment returns are guaranteed

The correct answer is: Cash values can be borrowed at any time

Liquidity in the context of a life insurance policy refers to the ability to access cash values that have accumulated within the policy. Specifically, this means that the policyholder can borrow against the cash value at any time, providing a source of funds that can be utilized as needed. This aspect of liquidity is important for policyholders who may need financial flexibility, as it allows them to tap into their policy’s cash value without having to surrender the policy or take a harsh financial loss. When considering other options, it's clear why they do not pertain to the definition of liquidity in a life insurance policy. Non-refundable premium payments signify a commitment of funds to the policy and do not relate to how readily cash can be accessed. The ability to sell the policy at any time can involve different market factors and might not reflect the immediacy of accessing funds, so it doesn’t pinpoint liquidity accurately. Lastly, investment returns guarantee can relate to the profitability of the policy but does not directly impact the cash value’s accessibility—thus, it is not a consideration of liquidity.