Advanced Diploma of Financial Planning (ADFP) Practice Test

What is a key feature of term life insurance policies?

1. Payable only upon diagnosis of a terminal illness

2. Payable only if the insured dies within the designated term

3. Includes a cash value component

4. Provides coverage for the life of the insured

The correct answer is: Payable only if the insured dies within the designated term

The key feature of term life insurance policies is that they provide coverage for a specified period, known as the "term." This means that the policy will pay a death benefit only if the insured passes away within that designated term. If the insured survives beyond the term, the policy typically does not pay any benefits and often expires without any cash value. This is a crucial distinguishing characteristic of term life insurance compared to other types of life insurance, such as whole life or universal life, which may offer lifelong coverage and potential cash value accumulation. In contrast, the other options focus on features that are not inherent to term life insurance. For example, the notion of a cash value component is applicable to whole life policies rather than term life. Moreover, the option concerning terminal illness payouts usually pertains to specific riders included in various types of life insurance, rather than being a standard feature of term life products. Lastly, the concept of providing coverage for the life of the insured aligns more with permanent life insurance structures, which are designed to remain active for the policyholder's entire life, unlike term insurance.