Essential Life Insurance Terminology Explained

Here, Ethos breaks down the insurance terminology and life insurance definitions you may need to know to compare your options and get the coverage you need.

Agent

Usually licensed by each state, an agent serves policyholders while representing an insurance provider or company. Agents may work with one company or represent multiple companies independently. 

Application

A life insurance company uses the information provided on a prospective policyholder's application to determine risk levels and premium rates. 

Beneficiary

Each life insurance policy comes with a death benefit: the money paid out in the event of the policyholder's death. The beneficiary is the person, persons, or entity named on the policy who receives the death benefit. The policy's owner makes this choice. 

Cash surrender value

For permanent life insurance with a cash value, policies may include a cash surrender value that pays out at the termination of a policy, prior to death or maturity. The cash surrender value is the cash available to a policyholder after surrender charges and outstanding loans. 

Claim

A claim occurs when notice is given to the insurance company of the insured's passing. This starts the process of paying the death benefit to the beneficiary. 

Conversion right

Some term life insurance policies allow the ability to convert a term life policy to a permanent (or whole) life policy. This right is often allowed for only a set length of time. Note that Ethos does not offer convertible policies.

Death benefit

This is the amount of money the life insurance company pays to the beneficiary, as set by the policy, upon the insured's passing. 

Free look

Think of a free look provision as a life insurance policy trial run. Often 30 days in length, but sometimes shorter or longer, the policyholder can cancel the policy within the free look duration for a full refund of premiums paid. 

Grace period

The grace period is the window of time the life insurance policy remains effective even if a premium payment is late. The late payment must be paid within the grace period to keep the policy intact. If the premium is not paid by the end of the grace period, the policy will terminate. 

Group life insurance

This is life insurance that covers a group of individuals, often owned by an employer. Typically offered as part of an employee benefits package, the death benefits for group life insurance are commonly much lower than an average individual policy. 

Insured

The person named in the life insurance policy is the individual the policy covers. The insured is often the same as the policyowner, but that's not always the case.  The insured’s death is what triggers a claim for the death benefit.

Insurer

The insurer is the life insurance company providing the policy. 

Permanent insurance

This type of life insurance covers the insured for the duration of their life, not a predetermined term of years. One common type of permanent insurance is whole life insurance. 

Policy

This legal document provided by the life insurance company to the policyholder contains the terms of the insurance contract. 

Policyowner

The individual who purchased and owns the life insurance policy is the policyowner or policyholder. Typically, the policyowner is the insured person, but that's not always the case. 

Premium

A premium is the financial payment the policyowner must make to the insurance company to keep the policy in force. The premium rate is often determined based on the risk assessment the insurance company determines from the information in the application. The premium may be paid in full, annually, quarterly, monthly, or other modes. 

Quote

A quote is an estimate of premium rates for a life insurance policy. It’s based on several factors provided by the prospective applicant, including age, health status, and gender.

Rating

Insurance companies create a risk rating for each potential policyholder. This rating may increase the standard premium rate if the insured is classified as having greater than average risk. Preferred rates provide more affordable insurance for low-risk individuals, whereas high-risk individuals — known as rated — will have higher premiums. 

Reinstatement

If a policy lapses, an insurance company may reinstate the original policy and its terms if unpaid premiums are paid, with interest, and provided that any additional criteria required by the insurance company are met. 

Rider

A rider is an addition to an insurance policy to modify or add provisions or coverage. 

Risk classification

Each insurance company has its own process for determining the risk associated with insuring an individual, commonly based on age, health, occupation, hobbies, and more. The insurance company's risk classification determines the availability of coverage and level of premium rates.

Term length

Term length is the length of time a term life insurance policy covers the insured. Common term life durations range from 10 years to 30 years. 

Term life insurance

A simple term life insurance definition is that it covers the insured for a predetermined length of time as long as premiums are paid, commonly anywhere from 10 years to 30 years. Explore term life policies. 

Underwriter

An underwriter is the individual who reviews the insurance application and determines the insured's risk classification. 

Underwriting

The process an insurance company sets for determining the risk classification of a prospective insured individual is dubbed the underwriting process. This process weighs risks and sets premium rates. 

Universal life insurance

A type of permanent life insurance with a cash savings component that can potentially accrue additional value over time. Universal life insurance also allows the policyowner to adjust premiums by using that cash value.

Variable life insurance

A type of permanent life insurance that allows the policyowner to invest the account's cash value. The death benefit will increase and decrease based on the performance of the investment. 

Whole life insurance

A simple whole life insurance definition is that it covers the insured for the duration of their life, not a predetermined term of years. It's a type of permanent life insurance. Like other permanent life insurance, it has a cash value that will grow over time. See how whole life insurance policies can work in your situation.