Certified Financial Consultant (CFC) Practice Exam

Which of the following best describes an insurance policy's term?

1. An unlimited period without renewal

2. A specified duration agreed upon by policyholder and insurer

3. A policy that can only be renewed annually

4. Any coverage not in effect at the time of application

The correct answer is: A specified duration agreed upon by policyholder and insurer

The term of an insurance policy refers to the specific duration that the coverage is active as agreed upon by both the policyholder and the insurer. This designated time frame can vary widely depending on the type of insurance and the specifics of the agreement, ranging from a few months to several years. During this period, the policyholder is entitled to the benefits outlined in the policy, provided that premiums are paid and other conditions are met. Understanding that the term signifies a measurable and predetermined period is critical for interpreting insurance agreements. For example, a one-year term means the policy is effective for that year, while a multi-year policy might last for several years before needing renewal. This clear definition separates it from other concepts, such as indefinite coverage or conditions related to renewal, which do not specify a time limit. The other options either misrepresent the nature of insurance terms or present irrelevant conditions that do not encapsulate what a term actually signifies in an insurance context. For instance, infinite duration or annual renewals do not necessarily denote a clear term of coverage.