The subaccounts into which Mr. Sumrisk directed his variable life premiums have earned a 6% return. If the assumed interest rate was 7%:
I. the cash value of his policy increased.
II. the death benefit associated with his policy decreased.
III. the cash value of his policy decreased.
IV. the death benefit associated with his policy increased.

Question

Quizplus · Accepted Answer

If Mr. Sumrisk's subaccounts earned a 6% return and the assumed interest rate was 7%, then the cash value of his policy increased, but the death benefit associated with his policy decreased. The cash value of the policy increases when the separate account earns a positive return, regardless of the size of that return. The death benefit, however, depends on both the return earned on the separate account and the assumed interest rate. Since the separate account returned less, in this case, than the assumed interest rate, the death benefit decreased.

The Subaccounts into Which Mr