Question

Josephine, an aspiring architect, made purchase of an intriguing life insurance policy. The policy states that a minimum interest rate is guaranteed on the cash value, but additional interest may be credited based on the investment performance of a group of common stocks. It also contains a cap on the additional interest credited to the policy. Based on this information, what type of life insurance did Josephine purchase?

	1.	variable life insurance
	2.	indexed universal life insurance
	3.	current assumption whole life insurance
	4.	variable universal life insurance

Answer 1

Josephine, an aspiring architect, made purchase of an intriguing life insurance policy. The policy states that a minimum interest rate is guaranteed on the cash value, but additional interest may be credited based on the investment performance of a group of common stocks. It also contains a cap on the additional interest credited to the policy. Based on this information, the type of life insurance Josephine purchase is indexed universal life insurance

Therefore correct answer is option: 2. indexed universal life insurance

Because universal life insurance policy is protected by the guaranteed minimum interest rate irrespective of interest rate performance. Additional interest may be credited based on the investment performance of a group of common stocks that means it is indexed to the performance of a group of common stocks. But there is a cap on the additional interest credited to the policy which is a typical feature of universal life insurance policy.

Universal life insurance policy is generally used by the investors who are more risk averse and value more to the guarantees. Therefore universal life insurance policy has limited upside potential because of cap on interest rate, minimum interest rate guarantee so downside is protected.