Washington Life Producer Practice Exam

If the consumer price index increases by 4%, how much may Ron increase the face value of his $100,000 life insurance policy with a cost of living rider?

1. $1,000

2. $2,000

3. $4,000

4. $5,000

The correct answer is: $4,000

The correct answer is based on understanding how a cost of living rider operates in relation to the consumer price index (CPI). A cost of living rider is designed to protect the face value of a life insurance policy against inflation, typically using the CPI as a benchmark to determine adjustments. When the CPI increases by a specific percentage, in this case, 4%, the face value of the insurance policy can be increased by the same percentage to maintain its purchasing power. Ron's original policy face value is $100,000. Therefore, to calculate the allowable increase: 1. Start with the original face value: $100,000. 2. Calculate 4% of $100,000, which is done by multiplying: $100,000 x 0.04 = $4,000. This means that Ron can increase the face value of his life insurance policy by $4,000 to account for the 4% increase in the consumer price index. Consequently, the face value of his policy would rise to $104,000. This adjustment ensures that the benefits provided by the policy remain equivalent in value despite inflation, preserving the intended financial protection for the insured's beneficiaries.