What is the term for a life insurance policy where the initial payments exceed the net premiums needed to cover future benefits over a specified period?

The term for a life insurance policy in which the initial payments exceed the net premiums required to cover future benefits over a specified period is a modified endowment contract. This type of policy is characterized by the way premiums are structured, especially in the early years.

In a modified endowment contract, the premium payments are higher initially, which can lead to a scenario where the policy accumulates cash value more quickly than what is necessary to cover the death benefit. This is significant because it can affect the tax treatment of the policy. Essentially, if a policy is classified as a modified endowment contract, it becomes subject to different rules regarding withdrawals and loans, which may have tax implications, such as potential penalties on distributions made prior to the insured reaching age 59½.

In contrast, whole life insurance typically involves consistent premium payments throughout the life of the policy, with cash value accumulation that corresponds to those steady payments. Term insurance does not build cash value at all, as it is designed to provide coverage for a specified term only. Universal life insurance allows for flexible premiums but generally does not have the timing and initial excess premium structure seen in modified endowment contracts. Therefore, identifying the policy that fits the description provided leads to recognizing the modified endowment contract as