PSI Life Exam Practice Test

In a Universal Life Insurance policy, what does the term 'corridor' represent?

1. The gap between premiums and cash value

2. The gap between the total death benefit and cash value

3. The corridor for investment options

4. The corridor for premium payment schedule

The correct answer is: The gap between the total death benefit and cash value

In a Universal Life Insurance policy, the term 'corridor' refers to the gap between the total death benefit and the cash value of the policy. This corridor is important because it helps to ensure that the policy qualifies as life insurance under federal tax laws. Specifically, the death benefit must be greater than the cash value by a certain margin to maintain tax advantages and avoid being categorized as a Modified Endowment Contract (MEC). The corridor essentially acts as a safeguard, ensuring there is sufficient death benefit relative to the cash value to uphold the life insurance status of the policy. This relationship between death benefit and cash value allows policyholders to have some flexibility in premium payments and investment choices, while still adhering to the requirements set forth by tax regulations. Understanding this corridor concept is vital for effective management of a Universal Life policy, ensuring that it remains compliant with applicable laws while providing the intended financial benefits.