Life Insurance Policies
Term vs. permanent
Term covers a set period and builds no cash value. Know the variants: level term, decreasing term (often mortgage protection), increasing term, annually renewable term (ART), and renewable/convertible features. Renewability guarantees the right to continue without new evidence but at a higher premium; convertibility lets the insured exchange to permanent coverage, usually priced at attained age or original age (original age costs more to exercise).
Whole life features level premiums, guaranteed cash value, and maturity at age 100 or 121. Forms: ordinary/straight life, limited-pay (20-pay, life paid-up at 65), single premium, and modified premium.
Universal life separates the three components: flexible premium, adjustable death benefit, cash value credited interest, and cost of insurance charges that rise as the insured ages. Option A (level) keeps a level death benefit while cash value reduces the pure insurance amount; Option B increases the death benefit as cash value grows. A no-lapse guarantee can keep the policy in force under defined conditions. If a UL fails the 7-pay test under IRC 7702A it becomes a modified endowment contract: withdrawals are taxed gains-first and generally penalized 10% before age 59½.
Variable products invest in a separate account, carry no guaranteed cash value, and are securities requiring a prospectus and proper registration. Indexed UL credits interest linked to an index subject to a cap, floor, and participation rate.
Also recognize survivorship/joint life, group life (master contract + certificate, conversion privilege), and juvenile policies.
Traps
"Term builds cash value" (no). "UL premiums are guaranteed" (no). Option B death benefits grow.
Worked example
$250,000 face with $50,000 cash value: Option A pays $250,000 (pure insurance $200,000); Option B pays $300,000.