Massachusetts State Life Insurance Practice Exam

Universal life insurance is designed with flexibility in mind, particularly regarding how premium funds are allocated between the cost of insurance and the cash value component. This type of policy allows policyholders to adjust their premium payments and, in some cases, alter the death benefit amount, which reflects the policy's adaptable nature.

The correct choice highlights that universal life insurance distinguishes how premium funds are allocated, meaning that policyholders can decide how much of their premium goes toward the insurance coverage and how much goes into the cash value account, which can grow over time based on interest rates set by the insurance company.

In contrast, the other options do not accurately describe universal life insurance. For instance, the tax treatment of death benefits may depend on various factors, and premiums and face amounts can be adjusted within certain limits. Additionally, while loans against the cash value are permitted, withdrawals may also be allowed, further illustrating the flexibility that universal life insurance provides.