Which of the following describes the condition where a policy loses value over time?

The condition where a policy loses value over time is best described by negative cash value. This term refers to situations in insurance policies, specifically those that build cash value, such as whole life or universal life insurance. Over time, as premiums are paid and costs accrue (for things like mortality charges or policy fees), the cash value can diminish, especially if withdrawals or loans are taken out against the policy. If the total value of the policy is less than what has been paid in premiums, it may be referred to as having a negative cash value. This highlights how the financial worth of the policy may decrease due to various factors affecting its accumulation of value.

In contrast, premium lapse refers to a situation where a policyholder fails to pay premiums, leading to termination of the policy. Depreciation of benefits typically relates to tangible assets and isn't usually used in the context of insurance policies. Policy surrender occurs when a policyholder voluntarily decides to terminate their policy before its maturity date, often resulting in cash value payout, but it doesn't necessarily imply a loss of value over time.