Last Updated 9/3/2020
Life insurance provides financial protection for loved ones should the policyholder die. Once a policy is issued, an insurer may not cancel it based on a change in the policyholder’s health status. There are several types of life insurance, allowing consumers to find a policy type that works for their personal situation.
Term Life Insurance
Term life insurance provides coverage over a specified period of time. Typically, term insurance policies are written for 1, 5, 10, or 20 years, or to a specified age (such as 65). Term policies only pay a death benefit to the beneficiary if the policyholder dies during the specified term and so is a good choice when the policyholder needs protection for a temporary time or a specific need. Term insurance has the advantage of being more affordable than permanent insurance, particularly in the early policy durations. There are a few different types of term life insurance policies:
- The most common, level term insurance, is characterized by level policy face amounts over the contract term period, usually 10, 20, or 30 years. The death benefit amount and policy amounts are usually guaranteed to remain level during this time, regardless of the insured’s health status.
- Decreasing term insurance policies feature a decreasing death benefit. A policyholder may use these types of policies to cover financial obligations that decrease over time, such as a mortgage.
- Renewable term insurance guarantees the policyholder the right to renew at the end of the contract period without evidence of insurability as long as the premium is paid.
- Convertible term insurance allows the policyholder to convert a term insurance policy to a permanent insurance policy that will build cash values in later years. Typically, these premiums are higher to reflect the additional cost of building up cash value for the policy.
- Term insurance policies can also have a Return of Premium (ROP) feature which refunds part or all of the premiums paid at the end of a level term period if death benefits are not paid out. Policies with this feature are more expensive because the policyholder has the ability to receive cash back.
Whole Life Insurance
Whole life insurance provides a fixed amount of insurance coverage over the life of the insured, with the benefits payable only upon the insured’s death. Whole life policies are designed to build tax deferred cash value, which is the accumulation of premiums collected less applicable expenses and applicable insurance charges and they allow for borrowing against the cash value of the policy. As mandated by state law, whole life policies contain nonforfeiture values payable in cash or some other form of insurance in the event the policy lapses from nonpayment of required premiums or the policy owner decides to surrender the coverage. There are several types of whole life insurance policies.
- A nonparticipating whole life insurance policy does not pay dividends to the policy owner, but rather the insurer sets the level premium, death benefits and cash surrender values at the time of purchase. These amounts are fixed at policy issue.
- A participating policy allows the insured to share in the insurers investment, expense and mortality experience by providing dividends used to reduce premium payments or to purchase paid-up additional insurance. The dividend options make these policies both more flexible and more expensive than nonparticipating policies.
- Indeterminate premium whole life insurance is a nonparticipating policy featuring adjustable premiums which are set annually and reflect the insurer’s mortality experience, investment earnings and expenses, although they may not exceed a guaranteed maximum rate. Premiums generally start out lower than other whole life insurance types.
- Ordinary level premium whole life insurance features premium payments that remain consistent until the death of the insured or attainment of a terminal age when the cash value equals the face amount of the policy.
- Limited payment whole life insurance can be either participating or nonparticipating. Premiums are paid over a shorter period, but still retain lifetime protection. These policies have higher premium amounts and accrue cash value faster than ordinary life policies, since they are paid over a shorter period.
- Single premium whole life insurance is a limited payment whole life policy allowing insureds to purchase guaranteed lifetime protection for a single upfront lump sum payment and thus have an immediate cash value.
Universal Life Insurance
Universal life insurance is permanent life insurance combining term insurance with a cash account earning tax-deferred interest. Under most contracts, premiums and/or death benefits can fluctuate at policyholder discretion. The policy stays in effect as long as the cash value is sufficient to cover the cost of insurance and loans can be taken against the cash value of the policy.
There are also variable universal life insurance products which are kept in an insurer's separate account. The interest accrued under these contracts are not guaranteed and may in fact be negative since interest is a function of the change in the market value of the separate account assets.
Recent years have seen the rise of indexed universal policies, which have both fixed and variable features. Under these policies, interest credits are linked to external index of investments, such as bonds or the S&P 500. These index products do provide an interest rate guarantee.
Life insurance and annuities are regulated by state insurance commissioners. The NAIC encourages states to adopt model laws and regulations designed to inform and protect insurance consumers. The NAIC Life Insurance Disclosure Model Regulation (#580) requires insurers to deliver to purchasers of life insurance information that will improve the buyer's understanding of the policy and ability to select the most appropriate plan for the buyer's needs. The NAIC Life Insurance Illustrations Model Regulation (#582) provides rules for life insurance policy illustrations that will protect consumers and foster consumer education. The NAIC Consumer Credit Insurance Model Regulation (#370) protects the interests of debtors and the public by providing a system of rate, policy form, and operating standards for the transaction of credit life insurance.
The NAIC Life Insurance Illustration Issues (A) Working Group, created in 2016, continues to explore how the narrative summary required by Section 7B of Model (#582) and the policy summary required by Section 5A(2) of Model (#580) can be enhanced to promote consumer readability and understandability. This includes how they are designed, formatted and accessed by consumers. The Working Group is currently discussing draft proposals to amend Model #580 to incorporate a policy overview requirement that encourages (not mandates) the use of a template by providing a safe harbor if the template is used.
The NAIC Life Actuarial (A) Task Force was formed to identify, investigate and develop solutions to actuarial problems in the life insurance industry. After adoption of the Standard Valuation Law (#820) by 46 states representing 87.5% of industry premium prior to July 1, 2016, the Standard Valuation Law became operative on January 1, 2017. The Task Force has adopted revised Generally Recognized Expense Table (GRET) factors for 2021. Additionally, work is continuing on mortality tables for valuation and minimum nonforfeiture requirements for guaranteed issue forms of life insurance and a revised methodology for calculating the YRT Reinsurance reserve credit.
Committees Active on This Topic
NAIC Consumer Resource Center
Be Skeptical About "Free Meal" Seminars
December 2017, NAIC Consumer Alert
Life Product Update Presentation
May 2017, SOA Life & Annuity Symposium
2017 Universal Life with Secondary Guarantees Survey
July 2017, SOA
Life Insurance – Top 10 Questions
New York State Financial Department
NAIC Consumer Alert – Life Insurance Roadmap
March 2016, NAIC
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Senior Health Policy Advisor and Counsel