Life Insurance
Policy types
Term provides pure death protection for a stated period and builds no cash value; it may be level, decreasing, increasing or renewable and convertible. Whole life is permanent with guaranteed premiums, guaranteed cash value and nonforfeiture options: cash surrender, reduced paid-up, and extended term. Universal life separates the mortality charge from the cash value and permits flexible premium and adjustable death benefit, with a no-lapse guarantee rider often used. Variable life and variable universal life place cash value in separate accounts, shifting investment risk to the owner and requiring a securities license.
Provisions and riders
Incontestability and suicide clauses run about two years. Grace period is typically 30 or 31 days. Misstatement of age or sex adjusts the benefit to what the premium would have purchased. Reinstatement requires evidence of insurability and payment of overdue premiums with interest. Ownership rights include naming beneficiaries, loans, surrender, assignment and settlement options. Beneficiary designations may be revocable or irrevocable, primary or contingent, and per stirpes or per capita. Common riders: waiver of premium, guaranteed insurability, accidental death, child term, accelerated death benefit, long-term care and disability income.
Annuities and taxation
Annuities are classified as immediate or deferred and fixed or variable; the accumulation phase builds value tax-deferred, and annuitization converts it to income, with a portion excluded from tax as return of basis. Death benefits are generally income-tax free to beneficiaries; cash value grows tax-deferred. A modified endowment contract loses favorable pre-death distribution treatment and incurs penalties on early withdrawals.
Traps
Confusing reduced paid-up with extended term; forgetting a policy loan accrues interest and reduces the death benefit; treating dividends as guaranteed (they are not); assuming a 1035 exchange covers every product.