Life Insurance: Policy Types, Provisions, Options, and Riders
Who is who
The owner controls the policy (beneficiary, loans, surrender); the insured is the life measured; the beneficiary receives proceeds. Owner and insured may be different people.
Product families
Term is pure death protection with no cash value: level, decreasing, annually renewable (ART), and renewable/convertible. Whole life has level premiums, guaranteed cash value, and guaranteed death benefit for life. Universal life offers flexible premiums and an adjustable death benefit, credited current or guaranteed interest. Variable products invest in a separate account, shift investment risk to the owner, and require a securities registration in addition to a life license.
Provisions that get tested
Entire contract; free look (10 days in California, 30 days for buyers 65+); 30-day grace period; incontestability after 2 years; suicide clause (typically 2 years); reinstatement within 3 years with evidence of insurability and back premiums with interest; misstatement of age or sex adjusts the benefit rather than voiding the policy.
Options
Nonforfeiture: cash surrender, reduced paid-up, extended term. Dividend options: cash, reduce premium, accumulate at interest, paid-up additions. Settlement options: lump sum, interest only, fixed period, fixed amount, life income.
Riders and tax traps
Waiver of premium, disability income, accidental death benefit, accelerated death benefit, child term, long-term care. A policy failing the 7-pay test becomes a modified endowment contract (MEC); loans and withdrawals are taxed gain-first and may incur a 10% penalty before age 59½.
Rule of thumb: incontestability bars challenges to misstatements on the application - but never bars the insurer from acting on nonpayment of premium.