Multiple Choice
An individual, age 50, purchased an annuity as an investment. Which of the following statements best describes how the annuity will be reported on the individual's financial statements?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
The investment gains from a universal life policy usually go toward:
A
Paying dividends to shareholders
B
Increasing the cash value of the policy
C
Funding the insurance company's general expenses
D
Reducing the face value of the policy
Verified step by step guidance1
Understand the concept of a universal life insurance policy: It is a type of permanent life insurance that includes an investment component, allowing policyholders to accumulate cash value over time.
Recognize that the cash value in a universal life policy grows based on investment gains, which are typically reinvested within the policy to increase its value.
Eliminate incorrect options: Dividends to shareholders are not directly related to the policyholder's investment gains, and funding the insurance company's general expenses is not the purpose of these gains.
Clarify that reducing the face value of the policy is not a standard use of investment gains in universal life policies. The face value typically remains fixed unless the policyholder opts for changes.
Conclude that the investment gains from a universal life policy are primarily used to increase the cash value of the policy, benefiting the policyholder by providing additional financial flexibility or future withdrawal options.
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