New York Child Abuse Identification and Reporting Practice Exam

Which problem was universal life insurance designed to address?

1. High premiums during low inflation

2. Low interest rates during periods of high inflation

3. High mortality rates

4. Limited investment options

The correct answer is: Low interest rates during periods of high inflation

Universal life insurance was specifically designed to address the issue of low interest rates during periods of high inflation. Traditional life insurance products often offer a fixed interest rate, which can become disadvantageous when inflation rises; the value of the policy's cash accumulation can diminish in real terms. Universal life policies allow for more flexibility in the interest rates applied to cash value balances, often linking those rates to a broader range of interest-earning investments. This adaptability means that during times of high inflation, the policy can adjust to provide better returns than traditional fixed-rate policies, helping to protect the policyholder's investment against the eroding effects of inflation. The design of universal life insurance includes features like adjustable premiums and death benefits, making it suitable for addressing the dynamics of interest rates in different economic environments, especially when inflation is a significant concern. This feature is particularly valuable in maintaining the value of the benefits over time, protecting policyholders from the negative impacts of inflation.