Arizona Life and Health Practice Exam

What is the term for the amount that represents the total premiums paid minus the total dividends received in cash or used to offset premiums?

1. Cash Value

2. Cost Basis

3. Loan Value

4. Policy Value

The correct answer is: Cost Basis

The term that represents the total premiums paid minus the total dividends received in cash or used to offset premiums is known as the Cost Basis. This figure is significant because it provides a clear indication of the net investment in the insurance policy, which is useful for determining the tax implications if the policy is surrendered or if benefits are received. Understanding the cost basis helps policyholders and insurance professionals assess the financial standing of a policy. As dividends can be received in cash or utilized to reduce future premium payments, they impact the overall investment in the policy, hence the necessity of considering them when calculating the cost basis. In comparison, cash value refers to the savings component of a permanent life insurance policy. Loan value indicates how much can be borrowed against the cash value of the policy. Policy value generally encompasses the total worth of the policy, including any death benefit and cash value, but does not specifically account for the net premiums paid relative to dividends.