Term and Permanent Life Insurance
The Term and Permanent Life Insurance domain tests product selection and the guarantees behind each design - what is guaranteed, who bears investment risk, how cash value accumulates, and how death benefits are structured.
Term life
Temporary, pure protection, no cash value. Level term keeps a fixed face amount and premium for the term; decreasing term (mortgage protection) shrinks the face; increasing term rises. Annual renewable term (ART) guarantees renewal without evidence of insurability at annually increasing premiums. Convertible term allows exchange to permanent coverage without new underwriting, converted at either attained age (no lump sum, higher ongoing premium) or original age (back premiums plus interest, lower premium). Renewable and convertible are different privileges; many term policies offer both.
Permanent life
- Whole life - level premium for life or to a stated age, guaranteed cash value and death benefit, loan and nonforfeiture rights. Limited-pay (20-pay, paid-up at 65) and single-premium versions compress funding. Participating policies may pay dividends, which are not guaranteed and are generally a return of premium for tax purposes.
- Universal life - flexible premium and adjustable death benefit; cash value credited declared interest with a guaranteed floor, reduced monthly by cost of insurance (COI), expense, and mortality charges. Option A pays a level face amount; Option B pays face plus accumulated cash value. Underfunding risks lapse.
- Indexed UL - interest credited by an external index subject to a cap, participation rate, and 0% floor.
- Variable and variable universal life - cash value in separate-account subaccounts; the owner bears market risk; sold with a prospectus by a securities-registered producer.
- Survivorship (second-to-die) pays on the last death, commonly used for estate liquidity.
Worked example
A 45-year-old holds convertible 20-year term and now wants permanent coverage. Converted at attained age, he pays 45-year-old whole life rates - no lump sum, higher ongoing premium. Converted at original age, he pays the difference in premiums back to age 35 plus interest, then 35-year-old rates permanently. Original-age conversion is cheaper long-run but requires the cash.
Traps
Believing UL premiums are fixed; assuming UL or whole life illustrated cash values are guaranteed; forgetting variable products require a prospectus and registered representative; mixing up renewal with conversion; and treating dividends as guaranteed or as taxable income.