Indiana State Life and Health Insurance Practice Exam

How are surrender charges deducted in a life policy with a rear-end loaded provision?

1. Deducted from the death benefit

2. Deducted when the policy is discontinued

3. Deducted from policy's cash value

4. Deducted when assigned to another policyowner

The correct answer is: Deducted when the policy is discontinued

The correct answer indicates that surrender charges are deducted when the policy is discontinued. In life insurance policies with a rear-end loaded provision, these charges are typically imposed at the time the policyholder decides to cancel or surrender the policy. A rear-end loaded provision means that the costs associated with the policy are deferred until a later time, rather than being taken out of early premiums. Thus, when the policy is discontinued—either by surrendering it for its cash value or lapsing the policy—the surrender charges become applicable. This approach allows policyholders to experience lower initial costs but recognizes that there will be penalties for accessing the cash value or terminating the policy early. The deduction from the cash value, as suggested in another choice, would not be accurate because these charges are specifically assessed only at the point of policy termination and are not taken from the cash value beforehand. Options regarding the death benefit or assigning the policy to another owner do not align with how surrender charges are generally structured in a rear-end loaded policy.