Life insurance policies can be designed to meet different needs. Some policies cover more than one person, while others are used to protect a child’s future insurability. Some policies also offer flexible premium options, letting the owner adjust payments and benefits over time.
Be aware that special tax rules can apply when a policy is funded too aggressively in the early years. If those rules are triggered, the policy’s tax treatment can change going forward.
Joint life insurance may be issued as term or whole life. A joint life policy covers two or more lives and pays the death benefit when the first insured person dies.
In contrast to a joint life policy, a survivor life policy pays the death benefit when the last insured person dies. This is often called 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. It 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 premium. This built-in increase provides 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 developed flexible premium policies in response to demand for more customizable coverage. These policies let you adjust the amount and timing of premium payments, as long as the policy has enough cash value to cover required charges. This flexibility gives the owner more control over the policy’s cost and structure over time.
Adjustable life insurance is a type of permanent life insurance that lets you change key elements of the policy - such as the premium amount, face value, and length of coverage - without canceling or replacing the policy. These changes apply only going forward and don’t affect past payments or coverage.
If the policy has built up enough cash value, the owner may reduce premium payments or temporarily stop paying premiums, as long as the policy charges are covered.
Universal life insurance is a flexible premium, permanent life insurance policy with an interest-sensitive cash value component. Each month, the accumulated cash value is credited with interest based on two parts:
The minimum rate is contractually guaranteed. The excess interest rate can 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 to build cash value efficiently. These policies allow flexible funding and offer tax-deferred growth, which can make them useful for long-term planning. Depending on the policy and market conditions, the interest credited to cash value may include both the guaranteed minimum and an additional amount declared by the insurer.
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 established the “seven pay” test. The Technical and Miscellaneous Revenue Act (TAMRA) created special rules for life insurance policies that fail this test. A policy fails the seven pay test if the premiums paid during the first seven contract years exceed the total 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 from an MEC, including loans, are taxable as income when received to the extent that the cash value exceeds the premiums paid. In addition, a 10% IRS penalty applies to 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 within the same policy. Universal life also allows premium and face amount adjustments and 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
Many owners pay as much as they can into these policies to grow tax-deferred cash value. But if premiums in the first seven years are too high, the policy becomes a Modified Endowment Contract (MEC). MECs lose some tax advantages. Loans and withdrawals from a MEC may be taxed - and penalized if the owner is under age 59½. Even policies issued before 1988 can become MECs if major changes are made.
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