Arizona Life and Health Practice Exam

What may NOT be deducted from premium payments or the cash value of a variable life insurance policy?

1. State taxes

2. Federal premium taxes

3. Administrative fees

4. Interest payments

The correct answer is: Federal premium taxes

Variable life insurance policies have specific guidelines regarding deductions that can be made from premium payments or cash value. Federal premium taxes are not typically deducted from these payments or the accumulated cash value because they are usually considered a tax applied to premiums collected rather than a direct deduction from individual policyholder accounts. In contrast, state taxes, administrative fees, and interest payments can all be deducted. State taxes may vary based on local law and can impact the overall cost associated with maintaining the policy. Administrative fees are charged by the insurance company for managing the policy and can be subtracted from the cash value. Interest payments, if any are applicable in the case of loans against the cash value, will also reduce that cash value or the account balance over time. This distinction is crucial for understanding how the overall value of the policy may be affected, especially when considering the growth of cash value and the net amount paid out in benefits.