Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What does partial surrender in life insurance refer to?

1. Cashing in part of the cash value of a policy

2. Giving up the policy completely for its value

3. Transferring ownership of the policy

4. Converting the policy into an annuity

The correct answer is: Cashing in part of the cash value of a policy

Partial surrender in life insurance refers to cashing in part of the cash value of a policy. Many life insurance policies, particularly whole life and universal life, accumulate cash value over time. The policyholder has the option to withdraw or "surrender" a portion of this accumulated cash value while keeping the policy active. This can provide the policyholder with liquidity for various needs, such as emergencies or significant expenses, without completely relinquishing the policy and its benefits. This option allows the policyholder to maintain coverage while accessing some of the cash value. The amount taken as a partial surrender will reduce the overall death benefit and may be subject to taxes depending on the gains taken from the cash value. This aspect of partial surrender distinguishes it from other options like giving up the policy entirely for its value, which would terminate all coverage and benefits, or transferring ownership, which would not involve accessing cash value. Converting a policy into an annuity also does not reflect the characteristics of partial surrender, as it involves a different type of financial product altogether.