Lifetime Coverage

• Permanent protection: Coverage lasts for the insured's entire life (typically to age 100 or 120)
• Guaranteed death benefit: Fixed amount paid to beneficiaries upon death
• No renewal required: Policy remains in force as long as premiums are paid

Level Premiums

• Fixed premium amounts: Never increase regardless of age or health changes
• Higher initial cost: More expensive than term insurance initially
• Cost-effective long-term: Becomes relatively less expensive over time as age increases
• Premium payment period: Can be paid for life or for a limited number of years

Cash Value Accumulation

• Guaranteed growth: Cash value increases at a guaranteed rate specified in the policy
• Tax-deferred: Growth is not taxed until withdrawn
• Access during lifetime: Policyowner can borrow against or withdraw cash value
• Separate from death benefit: Cash value and death benefit are distinct components

1. Ordinary (Straight) Life

• Continuous premiums: Paid for the insured's entire lifetime
• Gradual cash value growth: Builds slowly over decades
• Most common type: Standard whole life policy
• Example: Age 35 purchases policy, pays premiums until death or age 100

2. Limited Payment Life

• Shortened payment period: Premiums paid for specific number of years (10, 20, 30 years) or to certain age (age 65)
• Higher premiums: More expensive than ordinary life during payment period
• Paid-up policy: After payment period, coverage continues without further premiums
• Examples:
• 20-Pay Life: Paid up after 20 years of premiums
• Life Paid Up at 65: Premiums stop at age 65, coverage continues for life

3. Single Premium Life

• One-time payment: Entire premium paid upfront in single lump sum
• Immediate cash value: Substantial cash value from day one
• Modified Endowment Contract (MEC): Usually classified as MEC with tax implications
• Investment focus: Often used for wealth transfer or tax planning

4. Modified Premium Life

• Increasing premiums: Lower premiums initially, then increase after 3-5 years
• Then level: After initial increase, premiums remain level for life
• Redistributed cost: Spreads cost more favorably for younger buyers
• Example: Years 1-5 pay $100/month, then $175/month for life

Participating (Par) Policies

• Dividend payments: Eligible to receive annual dividends from insurer's profits
• Not guaranteed: Dividends are not contractually guaranteed (considered return of premium)
• Mutual companies: Typically issued by mutual insurance companies owned by policyholders
• Higher premiums: Usually more expensive than non-par policies

Non-Participating (Non-Par) Policies

• No dividends: Do not share in company profits
• Lower premiums: Less expensive due to absence of dividend potential
• Stock companies: Usually issued by stock insurance companies owned by shareholders
• Guaranteed only: Benefits limited to guaranteed policy values

Dividends are not guaranteed but represent a return of excess premiums when insurer's experience is better than expected. They are not taxable income since they're considered a return of premium.

Dividend Options

Policyowners can choose how to use dividends:

1. Cash Payment
2. Receive dividend as check
3. Immediate access to funds

4. No additional benefit to policy

5. Premium Reduction

6. Apply dividend to reduce premium payment
7. Lower out-of-pocket cost

8. Most common option

9. Accumulate at Interest

10. Leave dividend with insurance company to earn interest
11. Interest earned is taxable

12. Flexible - can withdraw anytime

13. Paid-Up Additional Insurance (PUA)

14. Purchase additional whole life coverage
15. No medical underwriting required
16. Increases both death benefit and cash value

17. Most popular option for maximizing policy value

18. One-Year Term Insurance

19. Buy term insurance with dividend
20. Amount equals cash value ("fifth dividend option")

21. Good for temporary needs

22. Premium Offset/Vanishing Premium

23. Use accumulated dividends to pay premiums
24. Policy becomes "self-paying" when dividends cover premium
25. Not guaranteed - depends on dividend performance

If a policyowner stops paying premiums, non-forfeiture options allow them to retain some policy value rather than losing everything. These options are required by law in all states for policies that build cash value.

1. Cash Surrender Value

• Terminate policy: Cancel policy and receive cash value
• Immediate payment: Lump sum paid to policyowner
• Taxable to extent of gain: Amount exceeding premiums paid is taxable
• Coverage ends: No more death benefit protection

2. Reduced Paid-Up Insurance

• Same type of policy: Whole life coverage continues
• No more premiums: Policy is "paid up" - no future premiums required
• Lower death benefit: Reduced based on cash value available
• Continues to build value: Cash value still grows at guaranteed rate
• Example: $100,000 policy with $20,000 cash value might become $45,000 paid-up policy

3. Extended Term Insurance

• Convert to term: Buy term insurance with cash value as single premium
• Same death benefit: Original face amount maintained
• Limited duration: Term length depends on cash value and insured's age
• No cash value: Pure term insurance - no further cash value accumulation
• Automatic option: Usually the automatic non-forfeiture option if none selected
• Example: $100,000 policy might convert to 15 years of $100,000 term coverage

Automatic Premium Loan (APL)

Not technically a non-forfeiture option, but related:
- Automatic loan: Policy loans premium amount if payment missed
- Prevents lapse: Keeps policy in force
- Interest charged: Loan accrues interest
- Must have sufficient value: Requires adequate cash value to cover loan

How Policy Loans Work

• Borrow against cash value: Use policy as collateral for loan from insurer
• Not a withdrawal: Cash value remains in policy as collateral
• Interest charged: Must pay interest (typically 5-8% annually)
• No credit check: Guaranteed right to borrow
• No repayment schedule: Can repay anytime or never
• Reduces death benefit: Outstanding loan + interest deducted from death benefit

Loan Provisions

• Maximum amount: Usually up to 90-95% of cash value
• Taxation: Loans are not taxable (unlike withdrawals)
• Policy lapse risk: If loan + interest exceeds cash value, policy lapses
• Loan repayment: Can repay principal and interest anytime

Example

Policy face amount: $100,000
Cash value: $30,000
Loan taken: $25,000
Loan interest: 6% annually

If insured dies with loan outstanding:
Death benefit paid: $100,000 - $25,000 (loan) - accrued interest = ~$73,500

Factors Affecting Growth

• Guaranteed interest rate: Minimum rate specified in policy (e.g., 2-4%)
• Policy dividends: Additional growth from participating policies
• Time: Longer policies accumulate more value
• Premium amount: Higher premiums = faster accumulation

Early Years

• Slow accumulation: Heavy acquisition costs in first 1-3 years
• Surrender charges: Early surrender may yield little or no cash value
• Break-even point: Typically 10-15 years before significant cash value builds

Later Years

• Accelerated growth: Cash value grows faster as policy matures
• Substantial value: Can represent significant portion of death benefit
• Retirement income: Can supplement retirement through loans or withdrawals

1. Lifetime protection: Coverage never expires if premiums paid
2. Level premiums: Predictable, fixed premium amounts
3. Guaranteed cash value: Minimum guaranteed growth rate
4. Tax-deferred growth: Cash value grows without current taxation
5. Policy loans: Access to cash value without credit checks
6. Forced savings: Disciplined savings mechanism
7. Estate planning: Guaranteed death benefit for beneficiaries
8. Creditor protection: Cash value often protected from creditors (varies by state)
9. No re-qualification: Never need medical exams or underwriting after issue

1. Higher premiums: Much more expensive than term insurance initially
2. Opportunity cost: Better investment returns may be available elsewhere
3. Complexity: More complicated than term insurance
4. Low early cash value: Takes years to build significant value
5. Inflexibility: Fixed premiums and structure
6. Interest on loans: Must pay interest to access own money
7. Potential lapse: If loans exceed cash value, policy can lapse
8. Lower returns: Conservative returns compared to market investments

Best For:

• Lifetime need: Guaranteed coverage need that won't expire (final expenses, estate taxes)
• Conservative investors: Those who want guaranteed, predictable growth
• Forced savings: Individuals who need disciplined savings mechanism
• Estate planning: High net worth individuals planning wealth transfer
• Business needs: Buy-sell agreements, key person insurance requiring permanence
• Supplemental retirement: Tax-deferred accumulation for retirement income

Not Ideal For:

• Temporary needs: Use term insurance instead
• Budget-conscious: Term offers more coverage for less money
• Aggressive investors: Variable or indexed products may perform better
• Flexibility seekers: Universal life offers more adjustability

• Whole life = permanent + cash value + level premiums
• Non-forfeiture options preserve value if premiums stop
• Extended term is usually automatic non-forfeiture option
• Policy loans reduce death benefit but are not taxable
• Dividends are not guaranteed and not taxable (return of premium)
• Participating policies pay dividends; issued by mutual companies
• Limited pay = higher premiums, shorter payment period, then paid up
• Single premium usually creates Modified Endowment Contract (MEC)
• Cash value grows tax-deferred at guaranteed minimum rate
• Death benefit is income tax-free to beneficiaries