Key life insurance terms to know
The good news is that we’ve got you covered. We compiled an easy to understand glossary containing the top life insurance terms and concepts. After you get through it, you’ll be better able to explore life insurance options and actually understand all of the nitty gritty details.
Important life insurance terms to know
Life Insurance: OK, this is an obvious one to get started, but it’s good to have an official definition of this all-important financial tool. Life insurance is a contract between an insurance policy owner and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) upon the death of the insured person.
Policy Owner: The individual or entity who owns the life insurance policy. In other words, you, if you decide to get life insurance! Though the policy owner is usually the insured individual, it could also be a relative, a business, or a trust.
Premium: This is the amount of money that the policy owner must pay to the insurance company to keep the policy active. Premiums can be paid monthly, quarterly, annually, or as a lump sum. When you’re shopping around for life insurance, the premium will be one of the major factors that you’ll want to compare so you can make sure it fits your budget.
Beneficiary: The person or entity designated by the policy owner to receive the life insurance payout upon the death of the insured. Put another way, the beneficiary will receive the death benefit payment to help ease their financial burden when you pass. This could be a spouse, child, relative, friend, trust, or charity. And, you may be able to have multiple beneficiaries.
Term Life Insurance: A type of life insurance that provides coverage for a specific period of time, or term (for example, 20 years). The way term life insurance works is that if the insured dies during the specified term, the death benefit will be paid to the beneficiaries. Once the term is over, the life insurance policy will end.
Permanent Life Insurance: A general term for life insurance policies that do not expire (unlike term life insurance). Permanent life insurance combines a death benefit with a cash value component that can be used to supplement an overall retirement strategy. . Whole and universal life insurance are examples of permanent life insurance.
Whole Life Insurance: A type of permanent life insurance that provides coverage for the insured's entire lifetime. In addition to a death benefit that is paid to beneficiaries, whole life insurance also can include a cash value component that grows over time. The insured policy owner may be allowed to access that cash while still living if needed.
Universal Life Insurance: Another type of permanent life insurance with a cash value component. However, it can offer more flexibility than whole life insurance as it allows policy owners to adjust their premiums and death benefits.
Death Benefit: The sum of money paid out to the beneficiary upon the death of the insured person. For most people, this is the key reason for taking out a life insurance policy. The death benefit can help ensure that the loved ones you leave behind are taken care of financially, that your debt obligations are paid, or your funeral expenses are covered.
Cash Value: Part of your permanent life insurance premium is designated to building up cash value, which grows over time. If your life insurance policy has a cash value, you may be able to borrow from it or withdraw money for various purposes.
Rider: An additional provision added to a life insurance policy that provides extra benefits, typically at an additional cost. Examples of riders include accelerated death benefit riders, waiver of premium riders, and accidental death benefit riders.
Accelerated Death Benefit: This type of rider can be attached to a life insurance policy that allows the policy owner to take an advanced payment from the death benefit if they suffer from a qualified terminal illness.
Underwriting: The process by which an insurance company evaluates the risk of insuring a potential policy owner. An underwriter will look over your application and consider factors like your age, gender, if you smoke, and your general health. For some policies, underwriting may also involve getting a medical exam. Some applications leverage automated underwriting, saving time for the applicant as underwriting decisions are often instant. The underwriting process will ultimately determine the cost of your premiums and whether or not you qualify for a particular policy.
Convertible Term Life Insurance: A term life insurance policy that includes a clause allowing the policy owner to convert the policy into a permanent life insurance policy, without going through another health examination or underwriting process. This provides more flexibility for when your term life policy comes to an end.
Face Amount: The amount of death benefit protection purchased in a life insurance policy, payable to the beneficiary upon the death of the insured. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends.
Grace Period: A period after the premium due date, usually 31 days (60 days in CA), during which an overdue premium may be paid without penalty. The policy remains in force throughout this period.
Incontestability Clause: A clause in most life insurance policies stating that once the policy is in force for a certain period (typically two years), the insurer cannot contest or deny a claim on the grounds of misrepresentation or concealment by the insured in the policy application.
Lapse: The termination or discontinuance of an insurance policy due to failure to pay the premiums within the grace period. Coverage can be reinstated after it has lapsed, but an application and evidence of insurability is typically required.
Suicide Clause: A clause in a life insurance policy that states that the policy will not pay the death benefit if the insured dies by suicide within a specified period after the policy inception, usually two years. This is to prevent people from buying insurance with the intent to commit suicide as a way to provide money for their heirs.
Ready to research life insurance
With a working vocabulary of these key insurance terms, you’ll be better prepared to begin exploring life insurance options. In fact, you can even take control of the whole process by considering an online life insurance policy that can be opened from the comfort of your home.
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ChatGPT was used for idea generation, but the author made significant modifications and takes ultimate responsibility for the content.