Life insurance policies can be tailored to meet a variety of needs. Some cover more than one person, while others are used to protect a child’s future insurability. Flexible premium options give policy owners the ability to adjust payments and benefits. Certain tax rules also apply when policies are funded too aggressively in the early years, which can affect their tax treatment going forward.
Joint life may be issued as term or whole life. A joint life policy covers two or more lives and pays the death benefit upon the death of the first person covered by the policy.
In contrast to a joint life policy, a survivor policy pays the death benefit upon the death of the last of the two or more lives covered under the policy. This is often referred to as a “last to die” (or second to die) policy.
Juvenile life insurance is typically purchased by a parent or grandparent and later assigned to the child at the age of majority. The main goal is to protect the child’s future insurability by securing coverage while the child is young and healthy. A popular variation is the jumping juvenile policy, which starts with a low face amount and level premiums. At age 21, the face amount automatically increases—often by a factor of five—without any change in the premium. This built-in increase allows for a larger amount of permanent coverage at an affordable rate and locks in the child’s insurability regardless of future health conditions.
Life insurance companies have developed flexible premium policies in response to market demand for customizable coverage. These policies allow the policyholder to adjust the amount and timing of premium payments, provided the policy has sufficient cash value to cover required charges. This flexibility gives the owner some control over the cost and structure of the policy over time.
Adjustable life insurance is a type of permanent life insurance that allows the policyholder to modify key elements of the policy — such as the premium amount, face value, and length of coverage — without having to cancel or replace the policy. These changes can only be made going forward and do not affect past payments or coverage. If the policy has built up sufficient cash value, the owner may choose to reduce premium payments or temporarily stop paying premiums altogether, as long as the policy charges are covered.
Universal life insurance is a flexible premium, permanent life insurance policy that includes an interest-sensitive cash value component. Each month, the accumulated cash value is credited with interest, which is based on two components: a minimum guaranteed interest rate set by the policy, and an additional excess interest rate determined by the insurer. While the minimum rate is contractually guaranteed, the excess interest rate is subject to change and may be adjusted by the insurer periodically — often monthly or quarterly — based on current economic conditions
Many policyholders choose to maximize premium payments into adjustable or universal life policies in order to build up cash value efficiently. These policies allow for flexible funding and offer tax-deferred growth, which can make them attractive for long-term planning. The interest credited to the cash value may include both a guaranteed minimum and an additional amount declared by the insurer, depending on market conditions and the policy’s structure.
At one time, investors used the rapid tax deferred accumulation of cash values in these policies as a place to put money and then borrow out the cash values, income tax free. This created a highly tax-favored investment with tax deferred growth and tax free withdrawals (loans) at will.
In 1988, the IRS caught on and established the “seven pay” test. The Technical and Miscellaneous Revenue Act (TAMRA) established special rules for life insurance policies that fail to meet the seven pay test. An insurance policy will fail to meet the seven pay test if the amount paid in premiums during the first seven contract years exceeds the sum of the seven level annual premiums required to pay up the policy. If too much money is “invested” in a whole life policy in the first seven years, it becomes a modified endowment contract (MEC) and loses its tax advantages.
Distributions, including loans, from an MEC are taxable as income at the time received to the extent that the cash value exceeds the premiums paid. In addition, a 10% IRS penalty is imposed on distributions from an MEC unless the owner is disabled or past age 59½.
Joint life pays when the first person dies. Survivor life pays when the last person dies. Juvenile insurance protects a child’s future insurability. A jumping juvenile policy uses level premiums and automatically increases the face amount at age 21 — without raising the cost.
Joint life covers more than one person
Survivor life pays on the last death
Juvenile insurance locks in insurability
Jumping juvenile keeps the cost fixed but boosts coverage later
Flexible premium policies let the owner adjust payments, as long as there’s enough cash value to cover charges. Adjustable life allows changes to premium, death benefit, and protection period — all within the same policy. Universal life also lets you adjust premiums and face amount, and it builds cash value based on a minimum rate plus extra interest the insurer declares. Flexible policies allow premium changes
Adjustable life adjusts premium and coverage
Universal life adds interest-based cash value
Most owners pay as much as they can into these policies to grow tax-deferred cash value. But if the premiums in the first seven years are too high, the policy becomes a Modified Endowment Contract (MEC). MECs lose some tax advantages. Policy loans and withdrawals from a MEC may be taxed — and penalized if the owner is under age 59½. Even old policies from before 1988 can become MECs if major changes are made.
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