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In this chapter, we explored the wide range of life insurance policy types available in the marketplace, beginning with the general concept that a life insurance contract creates an immediate estate for a named beneficiary the moment the insured dies. We then examined temporary (term) life insurance — the simplest, lowest-cost form of coverage — including decreasing, increasing, and level term, and the renewal and conversion privileges (ART/YRT, re-entry term, convertible term, and interim term) that let a policy owner extend or upgrade protection without proving insurability.
From there, we moved into permanent (whole life) insurance, which combines a level death benefit with a cash value savings element and is designed to mature at age 100. We compared the three basic forms — straight whole life, limited-pay whole life, and single-premium whole life — and then explored the nontraditional whole life variations (modified, graded premium, enhanced/economatic, indeterminate premium, current assumption whole life, and equity-indexed whole life) that lower the initial cost of permanent protection.
We then covered the alternative nontraditional products that dominate the modern marketplace: adjustable life, which allows prospective changes to coverage, and universal life, which unbundles the premium into pure protection and an accumulation account, offers Option A (level) or Option B (increasing) death benefits, and comes in indexed and guaranteed (no-lapse) variations. We distinguished these fixed products from the SEC-regulated variable life and variable universal life policies, which require producers to hold both a life insurance license and a FINRA securities license because the policy owner bears the investment risk.
Finally, we reviewed the special use products — family plans, family income and family maintenance policies, joint life and survivorship (second-to-die) life, and juvenile and jumping juvenile insurance — along with endowment contracts, modified endowment contracts and the seven-pay test, and other products including face amount plus cash value, AD&D, nonmedical insurance, participating versus nonparticipating policies, and the fraudulent STOLI/IOLI schemes.
| Topic | Key Points |
|---|---|
| General Concepts of Life Insurance | Life insurance involves transferring the risk of premature death from one party to another. Life insurance contracts create an immediate estate. Unlike other lines of insurance (e.g., property and casualty), there are no "standard" life insurance policies. |
| Temporary Life Insurance Products | Term life provides the most amount of life insurance at the lowest initial premium, with temporary or limited protection and no cash value. Decreasing term life insurance provides a death benefit that decreases gradually over the term (mortgage redemption insurance and credit life insurance are decreasing term policies; credit life's maximum benefit, individual or group, is the loan amount). Level term life insurance provides a level amount of protection for a specified period, after which the policy expires. The option to renew allows the policy owner to renew the term policy without evidence of insurability, but the new premium (a step-up premium) is always higher. Annually renewable term (ART/YRT) provides one-year coverage that renews automatically at an increasing premium. The option to convert gives the insured the ability to convert or exchange the term policy for a whole-life or permanent policy without evidence of insurability. The cost of insurance is the key factor when determining whether to convert term life insurance at the insured's original age or the insured's attained age. Interim term life insurance is a type of convertible term insurance written for a person who wants protection immediately, but who is not able to afford permanent protection immediately. |
| Permanent Life Insurance Products | Whole life insurance provides for the payment of a death benefit or face amount of coverage upon the death of the insured, regardless of when death occurs, with a level, fixed, or predetermined death benefit and premium, and tax-deferred cash value. Whole life is designed to mature (cash value = face value) at age 100. Ordinary whole life / straight life / continuous premium life is the most basic form, with premiums payable as long as the insured is alive. Limited payment whole life has a predetermined premium for a limited payment period. A single-premium whole life policy is the most expensive whole life policy initially, creates an immediate nonforfeiture value, and is always a modified endowment contract. Modified whole life insurance has an initial premium lower than straight whole life for an introductory period, after which the premium jumps to a rate higher than a straight life policy would have cost if taken out initially. A graded premium whole life plan has a lower premium than straight whole life in the early years, with premiums that increase annually for the initial period, then remain fixed. Enhanced whole life insurance (economatic/extraordinary life) is a low-premium, participating, permanent life insurance policy. Equity-indexed (indexed) whole life insurance shares in a percentage of the growth of an indexed investment (e.g., tied to the S&P 500), with guaranteed minimum interest and death benefit; these products are not considered securities. |
| Alternative Nontraditional Life Insurance Products | Adjustable life insurance combines flexibility and permanent insurance in a single plan, with prospective (future) adjustment provisions only, and offering permanent insurance. Universal life insurance is essentially a term policy with cash value (savings), flexible premiums, and an adjustable death benefit; it is considered a type of permanent insurance as long as the cost of insurance can be paid by the cash value or increasing premium payments. The policy owner may surrender the universal life policy for its entire cash value at any time. Target premium is a suggested premium used in universal life policies. Universal life insurance offers two death benefit options: Option A (the death benefit equals the cash values plus the remaining pure insurance — decreasing term plus increasing cash values) and Option B (the death benefit equals the face amount plus the cash values — level term plus increasing cash values). Indexed universal life insurance combines most of the features, benefits, and security of traditional life insurance with the potential of earned interest based on the upward movement of an equity index. |
| SEC-Regulated (Securities and Exchange Commission) Life Insurance Policies | Variable life: guaranteed minimum death benefit, death benefit and cash value vary based on investment performance, tax-deferred cash value deposited in a separate account and invested in securities, permanent insurance in which the owner controls the investment portion, fixed premium. Variable universal life (VUL): a hybrid of universal life and variable whole life, flexible premiums and a death benefit with control over the investment aspect, combines an investment feature and a flexible premium. Producers must hold both a life insurance license and a FINRA securities license to sell these products. |
| Special Use Life Insurance Products | The family plan policy is designed to cover all family members under one policy. A family maintenance policy consists of both whole life and level term insurance, which provides income for a specific period beginning on the date of death of the insured. A joint life policy covers two or more people and pays a benefit upon the first death of a covered person. The second-to-die (survivor) policy covers two or more people and pays a benefit upon the death of the last covered person. A juvenile life insurance policy is any type of ordinary life insurance policy that insures the life of a minor. An endowment policy is characterized by cash values that grow at a rapid pace so that the policy matures or endows at a specified date (i.e., before the age of 100), with higher premiums than a whole life policy and the quickest or accelerated cash value build-up, paying if the insured dies or if the insured survives the endowment (i.e., specified) period. A modified endowment contract is (according to IRS tables) considered to be a policy that's overfunded — MECs don't technically meet the IRS definition of a life insurance policy: they "failed the seven-pay test." Industrial life insurance is characterized by comparatively small issue amounts, such as $1,000, with premiums collected on a weekly or monthly basis. Monthly debit ordinary life insurance is a combination of industrial life insurance and ordinary life insurance. |
| Other Life Insurance Policy Concepts | A face amount plus cash value policy is a contract that promises to pay the policy's face amount plus the policy's cash value upon the death of the insured. Stranger-owned life insurance (STOLI) is when a person purchases life insurance only to sell it to a third party with no insurable interest. Investor-owned life insurance (IOLI) covers the life of an individual unrelated to the policy owner, initiated by the investor. Both STOLI and IOLI are considered fraudulent wagers on human life. A participating policy shares in the excess earnings (dividends) of a mutual insurer; a nonparticipating policy, issued by a stock insurer, does not. |
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