Pennsylvania Life and Health Insurance Exam Practice Question
An individual purchased a $50,000 whole life policy in 1988 and has paid $15,000 in premiums. What is the policyowner’s cost basis in this life insurance contract?
Correct Answer: A
Rationale: The cost basis in a whole life insurance policy is defined as the total amount paid in premiums by the policyowner. In this case, the individual has paid $15,000 in premiums, establishing that amount as the cost basis.
Option B ($35,000) incorrectly assumes that the difference between the policy's face value and premiums paid contributes to the cost basis, which it does not. Option C ($50,000) misrepresents the cost basis as the policy's face value, which is unrelated to the premiums paid. Option D ($65,000) incorrectly adds hypothetical future values or additional costs, which are not relevant to the cost basis calculation. Thus, $15,000 accurately reflects the total premiums paid.
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