New Jersey Life and Health State Practice Exam

What is a characteristic of a term life insurance policy?

1. It builds cash value over time

2. It is temporary coverage with no cash value accumulation

3. It is a permanent insurance product

4. It has guaranteed renewal for life

The correct answer is: It is temporary coverage with no cash value accumulation

A term life insurance policy is designed to provide coverage for a specified period, typically ranging from one to thirty years. One of its key characteristics is that it does not accumulate cash value over time, distinguishing it from permanent life insurance products, which do build cash value and offer lifelong protection. The nature of term life insurance is to provide temporary financial protection, allowing policyholders to secure coverage for specific needs, such as paying off a mortgage or supporting dependents during a critical period. This focus on providing pure protection without cash value accumulation makes term life insurance a more affordable option compared to permanent products. Additionally, because it's temporary, once the term expires, coverage ceases unless renewed or converted, reinforcing the idea that it serves a defined purpose for a limited time rather than providing lifelong coverage.