Question

A legal reserve in life insurance is a result of: a.) Premium taxes payable by life insurance companies being postponed during the early policy years. b.) Dividends being paid to policyowners. c.) Inadequate premiums in the early years being subsidized by investment earnings. d.) Excess premiums in the early policy years being invested at compound interest.

Answer 1

Answer is C that is inadequate premiums in the early years being subsidized by investment earnings.

Because This policy reserve (Legal Reserve) fund is a liability to the life insurance company. The fund is established as a way of determining or measuring the assets the company must maintain in order to be ableto meet its future commitments under the policies it has issued.If an insurance company’s reserve levels fall short, and it goes into what is called receivership, the remaining insurance companies in the state legal reserve pool must assume the liabilities and obligationsof the insurer. The amount they are required to accept are based on the amount of insurance and annuities they have issued in that state.