US GAAP categorizes long-duration contracts into a number of buckets, with slightly different rules applied to each contract type. We're going to focus on the three main buckets.
The first category is traditional life contracts.
These are ones where there is significant insurance risk in the contract, and where there are fixed premiums paid over a similar period as the benefits are paid. Examples of this are term life insurance and whole life insurance contracts.
The second category is limited payment contracts.
These are ones where there is significant or moderate insurance risk in the contract, but the premium paid is typically paid upfront or over a very short duration, whereas the benefits are paid over a much longer period.
Examples of this are fixed annuities.
The third category is universal life contracts.
These are ones where there is still some insurance risk, but where premiums are flexible and the policy values are not guaranteed, though a guaranteed interest rate may be offered for account values in the policy.
Each of these categories has slightly modified accounting for determining insurance reserves and also for how profits are earned over the life of the contract.
