Every life policy grows from two basic ideas: temporary protection (term) and permanent protection (whole life and its flexible cousins). This guide covers each major policy type—how the death benefit, premium, and cash value behave and who each suits—plus combination, special-purpose, and group policies. Knowing the trade-offs answers most questions in this area.

Term vs. permanent

• Term insurance is pure protection for a set period. It generally builds no cash value, gives the most death benefit per premium dollar, and simply expires with no value if the insured outlives it (unless renewed or converted). It fits large, temporary needs such as a young family on a tight budget.
• Permanent insurance can stay in force for the insured's whole life and builds cash value, a living benefit the owner can borrow against or take by surrendering the policy.

Term insurance

Features to know:

• Renewable – the owner may renew for another term without evidence of insurability, at a premium based on the insured's attained age.
• Convertible – the owner may exchange term for a permanent policy without evidence of insurability within the conversion period. Attained-age conversion uses the age at conversion; original-age conversion uses the issue age and requires paying the premium difference plus interest.
• Reentry term – lower renewal rates are available only if the insured proves insurability again.
• Return-of-premium (ROP) term – refunds premiums if the insured outlives the term; costs more than plain term.
• Term to age 100 – runs so long that it works much like permanent coverage.

Whole life

Whole life provides lifetime coverage with a level premium, a guaranteed death benefit, and guaranteed cash values. The cash value equals the face amount at the policy's maturity age, when the policy endows: age 100 under the 1980 CSO table, age 121 under the 2001 and 2017 CSO tables.

Premium-payment patterns:

• Straight (ordinary, continuous-premium) whole life – premiums for life (or to maturity); the lowest annual whole life premium.
• Limited-pay whole life – premiums for a set period (e.g., 20-pay, life paid-up at 65) with coverage for life; higher premiums and faster cash value growth.
• Single-premium whole life – one lump sum pays the policy up at issue. It almost always fails the 7-pay test and becomes a modified endowment contract (MEC).
• Modified whole life – lower premiums for the first few years, then a higher level premium.
• Graded premium whole life – premiums start low, rise for several years, then level off.

Variations on whole life:

• Interest-sensitive (current assumption) whole life – fixed face amount, but cash value credited at current rates.
• Indexed whole life – keeps whole life guarantees while linking some credited interest to a market index.
• Index whole life – the face amount adjusts with a cost-of-living or similar index.

Universal life (UL)

Universal life "unbundles" the policy: premiums go into an account, the cash value earns a current rate with a guaranteed minimum, and the insurer deducts the cost of insurance and expense charges monthly.

• Flexible premiums – the owner can pay more, less, or skip payments as long as the account value covers the monthly deductions. The target premium is the suggested amount to keep the policy in force as planned.
• Death benefit options:
  • Option A (Option 1) – level death benefit; as cash value grows, the net amount at risk falls.
  • Option B (Option 2) – face amount plus the cash value, so the death benefit increases.
• Lapse risk – if the account value can't cover the monthly deduction, the policy terminates after a grace period (at least 60 days under the IIPRC standard).
• Partial withdrawals permanently reduce the account value (and the face under Option A); unlike loans, they are not repaid.
• A no-lapse (secondary) guarantee keeps the death benefit in force even at zero cash value if required premiums are paid.
• Federal tax law (IRC 7702) requires a corridor between cash value and death benefit for the contract to qualify as life insurance.

Adjustable life lets the owner change the premium, face amount, or coverage period within limits.

Variable life and variable universal life

• Variable life – fixed premiums; cash value (and the death benefit above a guaranteed minimum) is invested in separate-account subaccounts chosen by the owner, who bears the investment risk.
• Variable universal life (VUL) – combines UL premium flexibility with separate-account investing.

Both are securities: they are SEC-registered, the buyer must receive a prospectus, and the producer needs a FINRA registration as well as a life license.

Indexed universal life (IUL)

IUL credits interest based on the performance of a market index such as the S&P 500, within limits:

• Cap – the maximum credited rate. With a 100% participation rate and a 10% cap, a 14% index gain credits 10%.
• Participation rate – the share of the index gain used. With 60% participation, a 10% gain credits 6% before any cap.
• Floor – the minimum credit, commonly 0%, so index losses don't reduce the credited value.

The cash value is not invested in separate-account subaccounts the owner directs, which is the key difference from VUL.

Endowments

An endowment builds cash value quickly and pays the face amount at maturity if the insured is living, or at death if earlier. A pure endowment pays only if the insured survives the period. Fast cash buildup can cause a policy to fail the federal tax definitions of life insurance.

Combination and special-purpose policies

Final expense and simplified products

• Final expense – a small whole life policy to cover funeral and last expenses.
• Pre-need – funds a prearranged funeral, paying the funeral provider (NAIC Model #817).
• Guaranteed issue – no evidence of insurability; higher cost and often a graded death benefit that limits payment for non-accidental death in the early years.
• Simplified issue – a short health questionnaire and no medical exam.
• Industrial (home service) life – small face amounts with premiums historically collected at the home by an agent.
• Franchise (wholesale) life – individual policies issued to members of a group too small for true group coverage.

Group life insurance

• The employer or other sponsor holds the master policy; each member receives a certificate of insurance.
• The most common form is yearly renewable term, usually issued without individual evidence of insurability because the group is underwritten as a whole. Eligible groups (employers, unions, associations) must exist for a purpose other than buying insurance. Group permanent plans also build cash value.
• Noncontributory plans (employer pays all) generally require 100% of eligible employees to be enrolled; contributory plans require a minimum percentage (traditionally 75%).
• Dependent coverage adds smaller amounts of term on spouses and children.
• Conversion – a member whose coverage ends may convert to an individual permanent policy without evidence of insurability within a window set by state law (31 days under Fla. Stat. 627.566, for example). If the person dies during that window without converting, the plan pays the amount that could have been converted.
• Federal COBRA applies to group health plans, not group life.
• A multiple employer trust (MET) lets small employers obtain group coverage together.

Credit life insurance

Credit life, usually decreasing term, pays off a borrower's debt if the borrower dies. The creditor is the beneficiary, and under the NAIC Consumer Credit Insurance Model Act (#360) the amount may not exceed the debt. A lender that requires credit insurance must let the borrower provide it through existing coverage or any authorized insurer.

Common exam traps

• Decreasing term: falling death benefit, level premium. ART: level death benefit, rising premium.
• Renewable and convertible both skip evidence of insurability, but one continues term and the other moves to permanent.
• UL Option A = level; Option B = face plus cash value.
• Variable products are securities (prospectus, FINRA registration); IUL credits index-linked interest without subaccounts.
• Joint life pays at the first death; survivorship pays at the second.
• Limited-pay policies are paid up early but cover for life.
• Single-premium whole life is almost always a MEC.
• Group members get certificates, not policies, and can convert without proving insurability.

Quick recap

• Term is temporary with no cash value (level, decreasing, increasing, ART; renewable and convertible features).
• Whole life offers lifetime coverage, level premiums, and guaranteed cash value; payment can be continuous, limited, single, modified, or graded.
• UL adds flexible premiums and Option A/B death benefits; VL/VUL invest in separate accounts (securities); IUL ties crediting to an index with caps and floors.
• Know the combination policies (joint, survivorship, family income/maintenance/plan) and special products (final expense, guaranteed issue, juvenile).
• Group life uses a master policy and certificates with conversion rights; credit life pays the lender up to the debt.