Life Insurance Terminology

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    Life Insurance Terminology You Need To Know

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    Buying a life insurance policy is a major decision. Before you sign a contract, it's best to understand the fine details and learn as much as you can about your life insurance coverage options.

    In this guide, we've compiled and defined some of the most common life insurance terms. You can refer to this any time you're confused about the words or phrases you see on your future or current life insurance policy.

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    What Is Life Insurance?

    Life insurance is a risk management tool that allows you to provide your family with financial protection if you pass away during the coverage period. Your beneficiaries can use proceeds from the policy to cover their daily living expenses, fund their education, pay off your debts, or cover your burial costs.

    Here are some of the most common types of life insurance:

    Permanent Life Insurance

    A permanent life insurance policy provides coverage throughout a person's entire life, provided that they continue to pay premiums. Typically, they have an insurance component and a savings component. The former allows beneficiaries to claim a death benefit upon the death of the insured. The latter allows the owner to have a savings or investment account that can grow in value over time.

    Here are some of the most common permanent insurance types:

    • Whole Life Insurance: This policy comes with level premiums and a level death benefit. It's also called ordinary or traditional whole life insurance.
    • Universal Life Insurance: Just like a traditional whole life insurance policy, universal life insurance also has a cash value and a death benefit. However, the policy owner can adjust the premiums and coverage amount depending on their current financial situation. The owner can also use the cash value to pay for premiums.
    • Variable Life Insurance: This type of permanent life insurance has a cash value that can grow depending on market trends. This gives your money the potential to have higher, tax-deferred growth. However, you can also lose money depending on the performance of your investments.
    • Variable Universal Life Insurance: This insurance type has adjustable premiums and death benefit amounts, just like a variable life insurance policy. Additionally, it has a cash value component that you can invest in various money market instruments, just like what you can do with a universal life insurance policy. Because of these qualities, it's considered a combination of both.
    • Burial Insurance: Also known as final expense insurance, this is a special type of permanent life insurance that's designed to cover the insured person's funeral and burial costs. Beneficiaries of a burial insurance policy may also use the payout to cover the policy owner's end-of-life expenses, like outstanding bills and debts.

    Term Life Insurance

    Term life policies provide coverage for a designated period of time, such as 1-30 years. Although term insurance doesn't provide coverage for the entire duration of a person's life, it comes with cheaper premium payments, making it an affordable option for most people. Once the term life insurance policy expires, then beneficiaries will no longer be able to claim a benefit.

    Here are some types of term life insurance:

    • Convertible Term Life Insurance: This type of term life insurance can be converted to a whole life insurance policy, regardless of the insured person's state of health at the time of conversion. Premiums for the whole life insurance policy will be based on the insured person's age when the policy was converted.
    • Renewable Term Life Insurance: This type of term life insurance can be renewed after the term period ends, even if the insured person's health declines. Premiums will be based on the owner's age during the time the policy was renewed.
    • Decreasing Term Life Insurance: This term life insurance policy has a death benefit that gets smaller over time. This is also known as mortgage protection insurance or private mortgage insurance because it's designed to help the policy owner pay off the remaining mortgage balance in case they pass away before the loan maturity date.
    • Level Term Life Insurance: This type of life insurance has premiums and a face amount that remains constant throughout the life of the policy.
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    A Glossary Of Life Insurance Terminology

    Now that you know the basics regarding life insurance, let's look at some of the most common life insurance terms. Keep in mind that definitions may change depending on the life insurance company, so it's best to clarify some of these items with your agent, as well.

    Accident: An unexpected circumstance or event that's not caused by any deliberate intent.

    Accelerated Death Benefit Rider: This policy add-on allows the insured person to claim part of the death benefit while they're still alive. Usually, you need to be diagnosed with a terminal illness in order to start using your accelerated death benefit rider.

    Accidental Death And Dismemberment Rider (AD&D Rider): This add-on allows your beneficiaries to get additional compensation in case you get injured or dismembered as a result of an accident. In the case of accidental death, your beneficiaries may also get extra compensation that's equal to the full amount of the death benefit. 

    Accidental Death And Dismemberment Insurance: Not to be confused with a rider, this is a standalone life insurance policy that only pays out the benefit in case the insured person dies or gets dismembered as a result of an accident. This type of policy has plenty of exclusions, so be sure to review the policy carefully. For example, most companies don't provide compensation for injuries incurred while engaging in criminal activity.

    Accrued Interest: This is the amount of interest that the cash value of your policy has compounded over time based on the initial interest rate.

    Actuarial Table: This is what life insurance underwriters use to determine the probability that a person will pass away at each age. This helps them analyze how risky it would be to issue a policy to that person and the premiums they would charge.

    Administrative Expense: This fee covers the operating costs of the life insurance company. This includes the money they spend on salaries, rent, underwriting, advertising, and medical examinations.

    Adverse Selection: This refers to the tendency of people with high-risk lifestyles to obtain life insurance compared to people with low-risk lifestyles. Life insurance companies usually avoid insuring high-risk individuals to avoid adverse selection.

    Agent: A state-licensed person who can help you purchase life insurance policies. They can represent one or multiple companies.

    Amount Of Insurance: This is the amount of money that's covered by the insurance company. This can also be called the sum insured, face amount, or coverage amount.

    Attending Physician Statement (APS): Life insurance applicants who are required to take a medical exam need to submit an attending physician statement. This is a written document that includes a written summary of the applicant's health or medical history.

    Annuity: This is a type of contract that allows you to get a fixed sum of money annually. Beneficiaries who have claimed a death benefit from a life insurance company can choose to receive the proceeds through an annuity instead of a lump sum payment. Going with this option allows the money that stays with the insurance company to accrue interest.

    Avocation: Avocations refer to hobbies or side jobs. Some of these activities are considered high-risk and may trigger the life insurance company to charge higher premiums. Examples of high-risk avocations are skydiving and scuba diving.

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    Backdating: This refers to the practice of getting a life insurance policy based on your actual age and not your closest physical age. For example, if your 25th birthday is on September 9 and you buy a policy in August, you can backdate your policy and pay premiums for a 24-year-old instead of a 25-year-old even if you're only a month away from your next birthday.

    Bonus Rate Annuity: This refers to an annuity that has a high-interest rate for the first year. An insurance company may offer a bonus rate annuity to attract new clients.

    Cash Surrender Value: The surrender value is the amount of money you'll get if you choose to give up your life insurance policy in order to claim its cash value. The cash surrender value is usually equal to the actual cash value of your policy minus outstanding loans and interest fees. Depending on what's stated on your insurance contract, you may also need to pay surrender charges.

    Cash Value Accounts: This refers to life insurance policies that accumulate cash value. Part of the premiums that the policy owner pays goes toward this cash value, allowing it to grow and earn interest.

    Child Protection Rider: This provision allows the policy owner to claim a benefit if their insured child passes away. This rider is designed to cover the child's funeral expenses. It can also replace the owner's income as they take time off to make funeral arrangements and grieve.

    Claim: Upon the death of the insured, beneficiaries can file a claim from the insurance company. They will need to provide the insured person's death certificate to make a claim.

    Collateral Assignment: Designating a life insurance policy as collateral for a loan is called a collateral assignment. Upon the death of the insured, the proceeds from the policy will be used to pay off the outstanding loan amount.

    Concealment: During the underwriting process, applicants are required to answer questions about their health and medical history. Withholding crucial information from the life insurance company is considered concealment.

    Contestability Period: This 1-2 year period is the time when the life insurance company can review the information you've provided when you applied for a policy. If they find that you have failed to disclose crucial information about your health, lifestyle, and occupation, they can deny claims made by your beneficiaries.

    Contingent Beneficiary: If the primary beneficiaries of your life insurance policy pass away before you, then contingent beneficiaries have the right to claim the death benefit. Contingent beneficiaries are not allowed to claim any money from your life insurance policy if at least one primary beneficiary is alive and is willing to make a claim.

    Contingent Owner: This is the person who will become the owner of a life policy in case the original owner dies.

    Coverage Period: This refers to the total period of time that a person has life insurance coverage from a certain policy.

    Critical Illness Rider: This add-on provision allows the policy owner to claim the full insured amount if they are diagnosed with a critical illness. These include cancer, stroke, or coma.

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    Death Benefit: This is the amount of money that is paid out to beneficiaries upon the death of the insured. It is also known as the face value of the life insurance policy.

    Disability Income Rider: This add-on allows you to receive money from your policy monthly to replace part of your income after you've become disabled.

    Disclosure Statement: This is a document that explains the terms and conditions of the life insurance policy.

    Dividend: If you purchase life insurance from a mutual fund company, you may be entitled to dividends. Dividends come from the insurance company's profits.

    Effective Date: This is the first day that your life insurance policy is considered active. For most life insurance policies, you need to complete all your application requirements and pay your first premiums before your policy can be considered active.

    Evidence Of Insurability: These are documents that show you're eligible for a certain amount of coverage. Evidence of insurability can include your income statements and birth certificate.

    Exclusions: These are conditions that make it impossible for you or your beneficiaries to make a claim. Exclusions include death by suicide or getting injured while engaging in a risky activity like skydiving.

    Face Amount: The face amount is what the life insurance policy is worth. It's the same as the policy's face value or death benefit. Keep in mind that the face amount does not include any extra benefits that are payable to the insured person or their beneficiaries, like an accidental death benefit.

    Financial Needs Analysis: This is an analysis that reviews a life policy applicant or owner's current financial goals and objectives. This helps them determine how much coverage they need.

    Grace Period: This refers to a specified period of time in which policyholders can keep their life insurance policy even though they have not paid premiums.

    Group Life Insurance Coverage: This type of life insurance is bought by employers, trade organizations, or associations as a benefit for their members. Group life insurance is usually cheaper than getting an individual policy but doesn't provide extensive life insurance coverage. Any member who leaves the organization will no longer be protected by the group policy.

    Guaranteed Issue: As the name suggests, guaranteed-issue policies don't require a thorough application process. All you have to do is to provide the insurance company with your personal information and send your payment. Guaranteed issue life policies typically have a lower face amount and come with higher premiums compared to policies that require more thorough underwriting.

    Guaranteed Purchase Options Rider: This add-on allows individuals to buy additional coverage during certain points in their lives regardless of their health. These life events can include getting married or having children.

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    Insurable Interest: Before you can list a person as a beneficiary, they need to provide proof of insurable interest. Usually, your spouse or children are presumed to have an insurable interest in your policy. More distant relatives need to provide financial documents to prove that they depend on you and will be affected financially if you were to die within the coverage period.

    Insured: This is the person covered by the policy. Usually, people who buy life insurance for themselves are both the policy owners and the insured. However, if you are buying life insurance as a gift for someone else, that effectively makes you the policy owner, while the person you bought it for the one who is insured. You need to provide proof of insurable interest if you plan on buying a policy for others.

    Insurer: This is the life insurance company that issues a policy to an applicant. Beneficiaries also claim proceeds from the insurer.

    Joint Life Insurance: This is a type of life insurance policy that insures more than one policy holder. Usually, couples purchase joint life insurance to gain insurance coverage at a more reasonable rate.

    Long-Term Care Rider: This provision allows you to withdraw money from the death benefit of your policy in case you need funds to cover professional long-term care services. People who can activate their long-term care rider are usually those who cannot perform at least two activities of daily living (bathing, toileting, dressing, etc.) due to an injury or chronic illness.

    Material Misrepresentation: Lying on a life insurance application is called material misrepresentation. If the life insurance company finds that you've misrepresented some of the information on your application, they can refuse to pay death benefits to any of your beneficiaries.

    Medical Information Bureau: This is an information bureau that keeps records of people's medical history. Insurance companies usually use information from this organization to verify if you've been honest in your application.

    Non-Participating Life Insurance Policy: This refers to any insurance policy that doesn't pay out dividends.

    Open Enrollment: This is the specific time of each year in which people can make changes to their group policy. For example, you can add dependents during this period.

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    Paid-Up Insurance: A certain life insurance policy reaches "paid-up status" when all remaining premiums have been completely paid off. You can also purchase paid-up insurance additions, which are "mini-policies" that function as sub-accounts to your main whole life insurance policy. These "mini policies" gain tax-deferred interest, allowing you to grow the cash value of your policy even more.

    Policy Lapse: This happens when a policy gets terminated after an insured person fails to make premium payments.

    Policy Loan: Owners who have a permanent life insurance policy can take a policy loan against the policy's cash value. The loan should be repaid with interest within a set period. If the insured person passes away with outstanding policy loans, then the outstanding amount (plus interest) will be subtracted from the death benefit.

    Policyholder or policy owner: This is the person who legally owns the life insurance policy. They're allowed to ask the life insurance company to make changes to their policy, such as changing beneficiaries. If you're purchasing insurance for children, parents, or grandchildren, you'll still be considered the policy owner.

    Premiums: This is the monthly or annual payments that you send to the life insurance company in exchange for coverage.

    Primary Beneficiary: This is the person who has the right to receive the proceeds from your policy. You can also list charities, trusts, or businesses as beneficiaries. Every policy owner is allowed to have more than one beneficiary, but you'll have to set the percentage each person or organization will receive.

    Quote: This is the estimated cost of your life insurance policy. It's typically based on your age, health, hobbies, and occupation. It's best to use a personalized life insurance calculator rather than relying on quotes posted online so that you can see prices that reflect your personal needs and situation. You can also have your agent provide you with life insurance quotes from multiple companies so you can make comparisons easily.

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    Renewable Term Life Insurance Rider: This add-on benefit allows you to renew your term life policy regardless of your current state of health.

    Return Of Premium Rider: This add-on benefit allows you to get back the premiums you've paid to the life insurance company after it expires.

    Riders: These are add-ons that you can add to a basic life insurance policy to gain more benefits. Note that these riders can drive up the cost of your premiums, so it's best to review each rider to see which ones you need or which ones you can let go. Getting some types of riders, like long-term care riders, require additional application steps like getting a medical exam.

    Risk Class: Life insurance underwriters put individuals into different risk classes depending on the individuals' age, state of health, occupation, and hobbies. The higher the risk class, the higher your premium payments will be.

    Settlement: Beneficiaries who've chosen to claim part of their death benefit through an annuity can get a settlement so that they can attain a lump sum payment. People who choose to sell their life insurance policies to a third-party company also get a settlement.

    Standard Risk: This is the risk classification that life insurance companies give to life insurance applicants with average life expectancy.

    Substandard Risk: This is the risk classification that life insurance companies give to applicants that have below-average life expectancy due to their health. If you're placed in this category, you'll usually be charged more expensive premiums.

    Surrender: This refers to the act of giving up your life insurance policy. You'll receive the cash value of your life insurance but will lose your coverage.

    Survivor Protection: Survivor protection is the aspect of life insurance that allows it to serve as a financial safety net for surviving family members or dependents. Survivor protection usually comes from claiming the death benefit from a life policy.

    Survivorship Life Insurance: Survivorship life insurance is a type of permanent life insurance that's designed for married couples. Heirs can claim the death benefit after both policyholders pass away then use it to pay estate taxes.

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    Term Date: This is the date that coverage for term insurance ends.

    Term Conversion Rider: This is an add-on to a term life policy that allows it to be converted to permanent life insurance at a later date. You can buy a term conversion rider when you first apply for a term insurance policy.

    Time Payment Of Claims: This is the specific period of time that claims need to be paid. Most life insurance companies pay within 30 to 60 days after the beneficiaries file a claim. Depending on what's on the contract, insurance companies may be liable to pay interest charges if they don't release benefits from a policy within this time.

    Trust: A trust is a legal entity where you can place assets. If you have very young children, you can assign a trust to be the beneficiary of your life insurance policy instead of assigning a minor, since they might not be able to make a claim after your death. It's best to consult an estate planning lawyer if you choose this option.

    Underwriter: This is a person employed by the life insurance company who is in charge of reviewing your application and seeing if you're eligible for a policy. They'll also determine which risk class you belong to and how much premiums you'll have to pay.

    Underwriting: This is the process in which a life insurance company reviews documents from an applicant to determine if they're eligible for coverage. Depending on the type of life insurance policy you apply for, the life insurance company may opt to review your medical history, hobbies, occupation, credit history, financial status, and medical exam results.

    Waiting Period: Some types of life insurance, like guaranteed-issue policies, have a waiting period. Beneficiaries are not entitled to claim proceeds from these policies if the insured person passes away within the waiting period.

    Waiver Of Premium Rider: This add-on allows you to stop premium payments without letting the policy lapse. It can be activated only when you become disabled and unable to work. If you recover from the injury or illness that caused the disability, you might be required to continue paying premiums.

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    Final Thoughts

    Life insurance terms can get confusing at first but having a handy guide will help you understand everything stated in your policy document. Always make sure to read and understand the fine print before signing an insurance contract to help ensure that your policy provides you with the coverage you need.

    If you need help understanding life insurance terminology, get in touch with Wesley LLC. We have knowledgeable agents who can help explain the details so that you can make the best decisions when it comes to purchasing insurance.

    Written By Cameron McDowell
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