Tennessee Life Producer Practice Exam

Cash surrendering a Universal Life insurance policy in its early years may raise concerns about which potential violation?

1. Fraud

2. Anti-Money Laundering violation

3. Insider trading

4. Tax evasion

The correct answer is: Anti-Money Laundering violation

Cash surrendering a Universal Life insurance policy in its early years raises concerns primarily related to Anti-Money Laundering violations due to the nature of the transactions and their potential implications. When a policyholder surrenders a life insurance policy, especially in the early years, the funds involved can be scrutinized for their source and legitimacy. If a significant amount of money is moved quickly or if the policy was purchased with the intent to convert it to cash, it may trigger red flags for financial institutions and regulators who are monitoring for money laundering activities. This concern arises because Universal Life insurance policies can be quite flexible, allowing for changes in the premium payments and death benefit, which could be exploited for laundering money. The early surrender of the policy could be indicative of trying to move illicit funds into the financial system, particularly if the policyholder had not built up substantial cash value, highlighting irregular behavior. Understanding these implications is critical for insurance producers as they must ensure that they advise clients properly and also remain vigilant for any activity that could be construed as money laundering. Recognizing these dynamics reinforces the importance of compliance within financial transactions, especially in the insurance industry.