Arizona Life and Health Practice Exam

When a life insurance policy is surrendered for its cash value, what is the amount termed that represents premiums paid minus dividends received?

1. Cash Value

2. Net Amount

3. Cost Basis

4. Policy Benefits

The correct answer is: Cost Basis

The term that represents the premiums paid minus any dividends received is known as the cost basis. This concept is crucial in understanding the financial aspects of a life insurance policy, particularly when it is surrendered for its cash value. The cost basis is essentially the net investment you have made in the policy. It reflects the total amount you have put into the policy (premiums) minus any returns you have received in the form of dividends, which may reduce your net investment in the policy. When a policyholder decides to surrender a life insurance policy, the cash value received may be subject to taxation. The cost basis is important for calculating any taxable gain upon surrender, as the gain is determined by subtracting the cost basis from the cash value received. Thus, knowing the cost basis helps policyholders understand their financial position when deciding to surrender their policy.