What type of life insurance allows policyholders to choose how their cash value is invested?

The correct answer is variable life insurance. This type of life insurance provides policyholders with flexibility not only in terms of premiums and death benefits but also concerning how the cash value is invested. In a variable life insurance policy, the cash value can be allocated among a range of investment options such as stocks, bonds, or mutual funds. The performance of these investments determines the growth of the cash value, meaning that it can fluctuate based on market conditions, which allows policyholders to potentially achieve greater returns compared to more traditional policies.

In contrast, whole life insurance typically offers a fixed premium and guaranteed cash value growth but does not allow for investment choices, limiting the potential for higher returns. Term life insurance, on the other hand, provides coverage for a specific period without any cash value component, so there are no investment options available. Universal life insurance does offer some flexibility regarding premiums and death benefits, but it usually has a more conservative cash value growth mechanism than variable life insurance, often tied to interest rates rather than direct investments.