All statements concerning whole life insurance are false EXCEPT When surrendered, income taxes may be owed

• A. The premiums rise with age
• B. When surrendered, income taxes may be owed
• C. The cash value grows at a fixed rate
• D. Dividends are guaranteed

Answer: (B)

The important point tested is the tax treatment when a whole life policy is surrendered. Whole life builds cash value on a tax-deferred basis, so if you surrender the policy, any portion of the cash value that exceeds the total premiums paid (the gains) is taxed as ordinary income in the year of surrender. That makes the statement about income taxes potentially being owed upon surrender true. The other statements aren’t universally true for all whole life policies: premiums are typically level for life, not rising with age; the cash value growth isn’t guaranteed to be at a fixed rate (especially with participating policies where dividends can vary); and dividends are not guaranteed.