Life Insurance
Policy types
Term covers a stated period with no cash value: level, decreasing, increasing, renewable, convertible, and return-of-premium forms. Whole life is permanent, with guaranteed premium, cash value, and death benefit; variations include limited-pay and single-premium. Universal life separates the insurance and cash elements, allowing flexible premiums and an adjustable death benefit (Option A level versus Option B increasing). Variable life and variable universal life place cash value in separate accounts with market risk - they are securities and require a securities registration in addition to a state license. Indexed UL credits interest by an index formula subject to a cap and floor.
Provisions testers love
Entire contract; free look; grace period; incontestability (generally two years); reinstatement (evidence of insurability, back premiums with interest, and a new contestable period); misstatement of age or sex adjusts the benefit rather than voiding the contract; suicide clause (usually two years, premium refunded); assignment; policy loans; nonforfeiture options (cash surrender, reduced paid-up, extended term); dividend options (cash, reduce premium, accumulate at interest, paid-up additions, one-year term); settlement options (lump sum, interest only, fixed period, fixed amount, life income).
Taxation and beneficiaries
Death proceeds are generally income-tax-free to the beneficiary; cash value grows tax-deferred; loans are not taxable unless the policy lapses or is surrendered. MEC status ends favorable tax treatment of distributions. A 1035 exchange moves life-to-life, life-to-annuity, or annuity-to-annuity tax-free. Beneficiaries: primary and contingent, revocable and irrevocable, per capita versus per stirpes, plus common disaster and spendthrift clauses.
Trap: dividends are never guaranteed. Rule of thumb: reduced paid-up trades face amount for permanence; extended term keeps the full face amount for a limited time. Example: at 60 a policy with $50,000 cash value becomes either reduced paid-up (smaller permanent face) or extended term (full $250,000 face for a set number of years).