Ch3. Life Insurance — Types and Structure

Classifications of Life Insurance

Death (Protection) Insurance:
Whole Life: pays a death benefit whenever death occurs
Term Life: pays only if death occurs within the policy term
  (no benefit if the insured outlives the term)

Endowment / Survival Insurance:
Pays a benefit if the insured survives to a specified date.
Annuity: pays income for as long as the insured lives.

Whole Life + Endowment Hybrid:
Pays on death or on reaching the maturity date.
Combines savings (cash value) with protection.

Variable Life / Variable Universal Life (VUL):
Premiums are invested in separate accounts (stocks, bonds, etc.).
Death benefit and cash value fluctuate with investment performance.

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Life Insurance Policy Structure

Premium Components:
Net/pure premium: funds claims
  → Mortality (risk) component + Savings component
Loading: covers insurer expenses (commissions, overhead)

Mortality (Risk) Premium:
The portion covering the pure cost of death protection.
Increases with age and health risk.

Savings (Cash Value) Premium:
Accumulates as policy reserve / cash value.
Funds the maturity benefit or annuity.

Cash Surrender Value (CSV):
Accumulated savings minus surrender charges.
In the early years, CSV is less than total premiums paid.

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Major Life Insurance Products

Whole Life Insurance:
Lifetime coverage; never expires.
Provides a death benefit + growing cash surrender value.
Higher premiums than term.

Term Life Insurance:
Coverage for a specified period (10, 20, or 30 years).
Lower premiums; no cash value; no maturity benefit.
Purpose: pure death protection at lowest cost.

Annuity:
Accumulates retirement savings; pays income in retirement.
Payments continue for the annuitant's lifetime.
Tax-deferred growth (qualified annuity under IRC § 72).

Variable Annuity:
Investment returns + annuity income stream.
Principal at risk (some products offer a minimum guarantee).

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Key Concept Cards

Whole Life = Lifetime; Term = Death Within the Term ★★★★★ : Whole life provides permanent coverage; term is time-limited. Memory hook: Whole = permanent, Term = temporary

Life Insurance = Fixed (Flat) Benefit ★★★★★ : At death, the insurer pays the pre-agreed face amount. Memory hook: Life = fixed dollar, not actual loss

Cash Surrender Value = Savings Minus Surrender Charges ★★★★☆ : Surrendering early returns less than total premiums paid. Memory hook: CSV = savings minus costs

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Practice Quiz

Q. When should someone choose term life versus whole life?

Term life fits: protecting income during child-raising years, covering a mortgage or debt repayment period — any temporary need. Premiums are far lower, so coverage can be maximized for the dollars spent. Whole life fits: estate planning (permanent need for a death benefit), desire for guaranteed cash value growth, or as a permanent income-replacement tool. A popular strategy: buy term and invest the premium savings separately — often more cost-efficient than whole life. Life stage and financial goals drive the choice; premiums for comparable coverage are far lower on term.

Q. What are the advantages and disadvantages of variable life insurance?

Advantages: investment upside, inflation hedge, long-term wealth accumulation potential. Disadvantages: investment risk (principal can decline), higher internal fees (M&E charges, fund expenses), complex product structure. Principal-protection riders (guaranteed minimum death benefits — GMDBs) are available but add cost. Comparison tip: variable life vs. term + low-cost ETF portfolio — analyze total cost of ownership. Consumer caution: poor investment performance shrinks the cash value, potentially forcing higher premiums or lapse.