Permanent & Whole Life

CARD T079

Permanent Life Insurance

Life coverage designed to continue for the insured’s lifetime if its requirements are met. Many permanent policies also build cash value.

How it works

Permanent coverage is designed for long-duration or lifetime protection if required funding and other conditions are maintained. Whole life, universal life, and variable forms have different guarantees and risks. Many build cash value, usually on a tax-deferred basis, but early surrender charges, loans, and inadequate funding can affect results. Permanent does not mean incapable of lapse. [36]

EXAMPLE

A permanent policy can continue after a 20-year term policy would end, but an underfunded flexible-premium policy can lapse before the insured dies.

Key distinction

Permanent describes the coverage design; it does not guarantee every policy will remain in force without attention or payment.

Practice Permanent Life Insurance · 3 questions

CARD T080

Whole Life Insurance

Permanent life insurance with contractual death-benefit and cash-value guarantees and a defined premium schedule. Ordinary whole life usually uses level premiums.

How it works

Traditional whole life has guaranteed benefits and cash values tied to a defined premium schedule. Ordinary straight life generally uses level premiums payable for the stated period. Participating policies may pay dividends, but dividends are not guaranteed. Loans and interest can reduce net proceeds; cash value is generally not added to the basic death benefit unless a feature provides otherwise. [21]

EXAMPLE

A whole life contract shows guaranteed values if required premiums are paid. A separate dividend illustration is not part of those guaranteed values.

Key distinction

Guaranteed cash value and nonguaranteed dividends are different. Cash value is not automatically an extra death benefit.

Practice Whole Life Insurance · 3 questions

CARD T081

Limited-Pay Whole Life

Whole life funded through premiums payable for a limited period. A 20-pay policy finishes scheduled premiums after 20 years.

How it works

Limited-pay whole life completes scheduled premiums over a shorter period, such as 10-pay, 20-pay, or paid-up at a stated age. Coverage is intended to continue beyond that payment period. For comparable coverage, compressing scheduled payments generally raises each payment relative to ordinary lifetime-pay whole life. [22]

EXAMPLE

A 20-pay whole life policy is fully funded under its scheduled premiums after 20 years. That does not mean the death protection expires at year 20.

Key distinction

Limited-pay limits the premium period. Term limits the coverage period.

Practice Limited-Pay Whole Life · 3 questions

CARD T082

Single-Premium Life Insurance

Life insurance funded with one initial premium under its terms. A single payment purchases the coverage.

How it works

A single-premium policy is funded by one initial payment under its contract. It is different from merely paying one annual premium on a continuing-premium policy. Rapid funding commonly causes modified endowment contract (MEC) tax treatment. The seven-pay test compares cumulative premiums with a statutory seven-payment funding limit. MEC withdrawals and loans are generally taxed gain-first, and the taxable portion may face a 10% additional tax before age 59½ unless an exception applies. Do not assume every withdrawal or loan is tax-free simply because the policy is life insurance. [33] [34]

EXAMPLE

An owner pays the required lump sum to purchase a single-premium life policy. A large one-time deposit is not the same as a promise of unlimited tax-free access to its values.

Key distinction

Single premium describes funding. MEC status concerns federal tax treatment of distributions.

Practice Single-Premium Life Insurance · 3 questions

Sources & further reading

Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.