Traditional Whole Life Insurance

How Do the Premium Designs Differ?

• Follow the actual premium schedule. Ten years of payments do not turn ordinary whole life into a ten-pay policy.
• A term policy ends at its stated term when no available renewal or conversion is exercised. A 20-year term is a coverage period; a 20-pay whole-life schedule is a funding period.
• Accumulating cash value does not turn ordinary whole life into flexible-premium coverage. Universal life may permit flexible funding under its own terms.
• The seven-pay test compares cumulative premiums paid during the first seven contract years with the policy's cumulative limit at that time. The limit uses seven level annual premiums that would fully fund future benefits. Paying above it can create a modified endowment contract (MEC), a life policy with different federal distribution tax treatment.
• Single-premium funding does not automatically prove MEC status. Compare cumulative amounts paid with the contract's applicable cumulative seven-pay limit.

Exam Tip: Gotchas

• Do not treat years already paid as the policy's scheduled payment period.
• One premium does not by itself prove modified endowment contract status.

Which Values Are Guaranteed?

The death benefit is the amount payable under the policy's death-benefit provisions. The face amount is the base amount shown in the policy before applicable adjustments. Cash value is policy value available during the insured's life under the contract's terms.

• The contract states its guaranteed death benefit and cash-value schedule.
• An illustration shows guaranteed values separately from values based on current assumptions. A projection is not a contractual promise.
• The policy year and contract conditions determine when a scheduled cash value is available.
• Cash value is not automatically added to the face amount at death. The beneficiary receives the policy's stated death benefit unless the contract provides another result.
• Policy debt, permitted withdrawals or partial surrenders, surrender charges, and other contract adjustments can reduce the net value or benefit available.

Exam Tip: Gotchas

• Cash value and the death benefit are distinct contract amounts.

How Do Participating and Nonparticipating Contracts Differ?

A policy dividend is an insurer-declared distribution to an eligible participating policyowner. It is not guaranteed.

• Insurer experience means the company's actual investment earnings, claims, and expenses. That experience and the insurer's dividend declaration determine whether a policy dividend is paid.

• Variable life is a different design: the owner selects investment options whose performance can raise or lower cash value. Participating status concerns policy dividends; it does not establish a variable investment account.

When a dividend is declared, common contract choices may include:

• Receive it in cash.
• Apply it toward a premium. The owner must pay any remaining premium shortfall.
• Leave it with the insurer to accumulate at interest.
• Buy paid-up additions, which are additional permanent insurance requiring no later premiums for those additions.

These are common choices, not a universal complete list. A year with no declared dividend does not by itself turn a participating policy into a nonparticipating policy or cancel guaranteed benefits when the contract's other conditions are met.

Exam Tip: Gotchas

• Participating-policy dividends are not guaranteed.

How Can You Access Cash Value?

• A policy loan borrows against available value, creates debt, and accrues interest.
• Unpaid principal and interest can reduce the cash surrender value or death proceeds.
• A permitted withdrawal or partial surrender removes value and can reduce cash value and the death benefit.
• Full surrender pays the net available surrender value and ends coverage. A living owner does not receive the face amount as a death benefit.

Net surrender example

A policy shows $22,000 of surrender value before a required $2,500 deduction for loan principal and interest.

1. Start with the stated surrender value: $22,000.
2. Subtract the policy debt: $22,000 - $2,500.
3. The owner receives $19,500, assuming no other adjustment applies.

Use the death-benefit provisions and debt deductions instead if the insured dies while coverage is in force.

Full-surrender tax check

Federal guidance generally includes full-surrender proceeds above the policy's cost in income.

1. Determine the full-surrender proceeds.
2. Use the applicable adjusted policy cost supplied for the transaction. Adjustments can apply, so total premiums alone do not always establish this amount.
3. Subtract policy cost from proceeds. A positive difference is generally included in income.

Example: If full-surrender proceeds are $30,000 and the policy's cost under this rule is $24,000, the difference is $6,000. This full-surrender calculation is not an automatic basis formula for every loan, withdrawal, or partial surrender.

What Coverage Can Remain When Premiums Stop?

Nonforfeiture options use available policy value instead of simply giving up that value after scheduled premiums stop.

The contract's available value, policy debt, and rates determine the actual result.

What Should You Check on Exam Day?

• Which premium design continues scheduled payments the longest?
• Which figures are guaranteed, and which depend on assumptions or a dividend declaration?
• How can a loan, withdrawal, or surrender change policy value or benefits?
• How do reduced paid-up and extended-term insurance differ?