What type of life insurance policy did K purchase in 1986 that was subject to higher premiums due to falling interest rates?

The correct answer is a Universal Life Policy. This type of life insurance policy combines a death benefit with a cash value component that grows based on interest rates. In the context of falling interest rates, the cash value growth can be adversely affected, leading to higher premiums if K wished to maintain the policy’s benefits or keep the cash value from diminishing. Universal Life policies are designed to offer flexibility in premium payments and death benefits, but this flexibility can lead to increased costs if the underlying interest rates drop significantly.

In contrast, Whole Life Policies provide guaranteed premiums and guaranteed cash value growth, which is unaffected by interest rate fluctuations in the same way. Term Life Policies are purely for providing death benefits for a specific term and do not have a cash value component. Variable Life Policies allow policyholders to allocate cash values among various investment options, but they do not inherently result in higher premiums due to falling interest rates as they are tied to market performance rather than fixed interest rates.