California Life and Health Insurance Practice Exam

What is a life insurance policy's limit of liability?

1. The annual premium amount

2. The policy's face amount

3. The cash surrender value

4. The death benefit payout

The correct answer is: The policy's face amount

The limit of liability for a life insurance policy refers to the maximum amount the insurance company is obligated to pay upon the insured's death, which is represented by the policy's face amount. This face amount is the predetermined sum that is stated in the policy, and it is the amount that is paid out to the beneficiaries when the insured passes away. It provides a clear expectation for both the policyholder and the beneficiaries regarding the financial benefit that will be available in the event of the insured's death. Looking at the other options, the annual premium amount is what the policyholder pays to maintain the policy but does not represent the insurer's liability. The cash surrender value is the amount the policyholder would receive if they decide to terminate the policy, which can be different from the face amount. The death benefit payout refers to the overall benefit the beneficiaries receive, which aligns with the face amount but can be influenced by additional factors such as policy loans or outstanding debts. However, at its core, the face amount distinctly identifies the limit of liability that the insurance company agrees to pay.