Certified Financial Consultant (CFC) Practice Exam

What is the typical purpose of a term life insurance policy?

1. To provide lifelong coverage

2. To cover temporary financial needs

3. To accumulate cash value

4. To gain tax advantages

The correct answer is: To cover temporary financial needs

The typical purpose of a term life insurance policy is to cover temporary financial needs. Term life insurance is designed to provide protection for a specific period, which can range from one year to several decades. This type of policy pays a death benefit if the insured passes away during the term of the policy, making it particularly suitable for covering obligations that are time-sensitive, such as a mortgage, dependent children's education, or other short-term financial responsibilities. The nature of term life insurance is to address needs that are expected to decline over time; for example, as children grow up and become financially independent or as debts are paid off, the need for life insurance coverage may lessen. Additionally, term life insurance tends to be more affordable than whole life or universal life policies, as it does not have a cash value component, making it more accessible for those needing coverage for a finite duration. In contrast, policies designed for lifelong coverage or those that accumulate cash value serve different purposes and structures, which do not align with the primary function of term life insurance. Tax advantages, while applicable in certain contexts, are not the defining characteristic of term life coverage.