Life Insurance Policy Types and Features
Term insurance
Temporary protection with no cash value. Level term, decreasing term (often matched to a declining mortgage), increasing term, and annually renewable term (ART), whose premium rises each year. Renewable term guarantees continued coverage to a stated age without new evidence; convertible term exchanges coverage for permanent insurance without evidence of insurability, usually at attained or original age. Return-of-premium term refunds premiums at the end of the term for a much higher cost.
Whole life
Level premium, guaranteed cash value, guaranteed death benefit, and dividends if participating (not guaranteed). Variations: ordinary (pay to 100/121), limited-pay (20-pay, paid-up at 65), and single premium. Modified and graded premium versions charge less early, with less early cash value.
Universal and variable life
Universal life separates the death benefit from the account value: premiums are flexible, and mortality and expense charges are deducted monthly. Option A is a level death benefit; Option B is a specified amount plus the cash value. A corridor test prevents the contract from becoming a pure investment. A no-lapse guarantee applies if minimum premiums are paid. Variable and variable universal life invest in separate-account subaccounts and are securities - the producer needs an insurance license plus FINRA registration, and the client receives a prospectus. Indexed universal life credits interest by formula with caps, floors, and participation rates.
MECs and special markets
A policy that fails the 7-pay test is a modified endowment contract: withdrawals are taxed LIFO with a 10% penalty before age 59½. Joint/survivorship (second-to-die) policies pay on the second death; juvenile and family policies cover children.
Trap: "guaranteed" vs "current" universal life illustrations is a common distractor.