Understanding Common Life Insurance Terms
Key Life Insurance Terms
Beneficiary: The person or entity designated to receive the death benefit from your life insurance policy. This can include individuals, family members, charities, or trusts.
Death Benefit: The sum of money paid to the beneficiary upon the policyholder’s death. This is the primary purpose of life insurance.
Face Amount: The total coverage amount of your life insurance policy, equivalent to the death benefit.
Premium: The payment made regularly (monthly, quarterly, semi-annually, or annually) to keep your life insurance policy active.
Policy: The legal document outlining the terms and conditions of your life insurance coverage.
Term Life Insurance: Life insurance that provides coverage for a specified period, such as 10, 20, or 30 years. If the insured dies within the term, the beneficiary receives the death benefit. If the term expires while the insured is still alive, the policy ends with no payout.
Permanent Life Insurance: Life insurance that covers the insured for their entire life and includes a cash value component that accumulates over time.
Cash Value: A savings element of permanent life insurance policies. This amount grows over time and can be borrowed against or withdrawn, though doing so may reduce the death benefit.
Whole Life Insurance: A type of permanent life insurance with fixed premiums and a guaranteed death benefit. The cash value grows at a fixed rate.
Universal Life Insurance: A flexible type of permanent life insurance that allows adjustments to the premium and death benefit. The cash value grows based on market performance.
Variable Life Insurance: Permanent life insurance where the cash value is invested in mutual funds. The death benefit and cash value fluctuate based on the performance of these investments.
Riders: Optional features added to a life insurance policy for additional coverage or benefits. Common riders include accidental death benefit, terminal illness benefit, and long-term care benefit.
Premium Waiver: A rider that waives premium payments if the policyholder becomes disabled.
Living Benefits: Features that allow access to a portion of the death benefit while the insured is still alive, typically used to cover long-term care or other significant expenses.
Contestability Period: Usually a two-year period during which the insurance company can investigate the application and deny claims if they find any misrepresentations.
Grace Period: Typically a 30-day window after a premium due date during which the policyholder can make a payment without the policy lapsing.
Lapse: Occurs when a life insurance policy terminates due to non-payment of premiums.
Surrender Value: The amount received if a permanent life insurance policy is canceled. This is usually less than the total premiums paid.
Beneficiary Designation: The process of naming the individual(s) or entity that will receive the death benefit.
Policy Loan: A loan taken against the cash value of a permanent life insurance policy. Interest is charged, and unpaid loans reduce the death benefit.
Waiver of Premium: Similar to the premium waiver rider, it allows for the waiving of premium payments if the insured becomes disabled.
Accelerated Death Benefit: A rider permitting access to a portion of the death benefit if the insured is diagnosed with a terminal illness.
Guaranteed Insurability Option: A rider that allows the purchase of additional life insurance at specified intervals without a medical exam.
Return of Premium: A rider that refunds premiums if the insured outlives the term of a term life insurance policy.
Group Life Insurance: Life insurance provided through an employer or organization.
Individual Life Insurance: Life insurance purchased independently by an individual.
Underwriting: The process by which an insurance company assesses risk and determines premiums.
Actuarial Tables: Tables used to calculate the probability of death at various ages, assisting in determining premiums.
Mortality Rate: The rate at which deaths occur in a specific population.
Life Expectancy: The average number of years an individual is expected to live.
Premium Payment Options: Various methods for paying premiums, including monthly, quarterly, semi-annually, or annually.
Policy Surrender: The process of canceling a life insurance policy.
Death Claim: A claim filed with the insurance company following the insured’s death.
Proceeds: The money paid out to the beneficiary upon the insured’s death.
Policyholder: The owner of the life insurance policy.
Insured: The person whose life is covered by the policy.
Exclusion: Specific conditions or events not covered by the policy.
Premium Financing: Paying life insurance premiums through a loan.
Life Insurance Trust: A trust established to hold and manage a life insurance policy.
Tax Implications: The tax consequences related to owning and receiving life insurance benefits.
Life Insurance Broker: A licensed professional representing multiple insurance companies to help clients find the best policy.
Life Insurance Company: A company that provides life insurance coverage.
Financial Advisor: A professional offering advice on life insurance and other financial matters.
