New Jersey Life and Health State Practice Exam

What is a corridor in relation to a Universal Life insurance policy?

1. The total death benefit only

2. The gap between the total death benefit and the policy's cash value

3. The cash value exclusive of the death benefit

4. The amount of premiums paid

The correct answer is: The gap between the total death benefit and the policy's cash value

A corridor in relation to a Universal Life insurance policy refers to the gap between the total death benefit and the policy's cash value. This concept is important in Universal Life insurance because it ensures that the death benefit remains higher than the cash value of the policy, preserving the policy's status as a life insurance contract. In Universal Life policies, the death benefit can be structured in two ways: as a level benefit or an increasing benefit. The corridor is particularly relevant when discussing the increasing death benefit option, where the death benefit must always exceed the cash value. This restriction helps maintain the policy's tax advantages under IRS regulations, specifically ensuring that the policy qualifies as life insurance rather than a modified endowment contract (MEC). Overall, recognizing the function of the corridor is essential for understanding how the different components of a Universal Life insurance policy interact, particularly in relation to maintaining eligibility for favorable tax treatment and providing a death benefit that goes beyond the accumulated cash value.