Key Life Insurance Terms

Life insurance has its own language

Couple in office signing insurance contract with agent
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Whether you’re shopping for life insurance or trying to understand a policy you already own, it’s helpful to know the meaning of common life insurance terms. The following are a handful of life insurance terms organized, generally, by topic.

Policy Basics

Policyholder: The person who owns the life insurance policy is often the person insured, but not always; also referred to as the policy owner.

Beneficiary: The person (beneficiary) or persons (beneficiaries) who receive the death benefit when the insured person dies.

Insured: The person whose life is insured by the policy: If they die while the policy is in force, the beneficiaries receive the death benefit.

Death benefit: The amount the beneficiary or beneficiaries receive from a life insurance policy when the person insured dies.

Evidence of insurability: Information you provide the insurer via your application (including your exam if you take one) plus information the company acquires to determine if you’ll be approved for a policy. The latter might include your driving history and medical information.

If you can’t provide evidence of insurability, you may be able to purchase a guaranteed issue life insurance policy. 

Face value or face amount: A life insurance policy’s face value is typically the amount of death benefit it will pay when the insured dies. Some permanent policies may pay more or less than this amount, depending, for example, on any loans made against the cash value or paid-up additions of life insurance.

Premium: The amount paid, usually by the owner, to keep the life insurance policy in force. Payments could be annual, monthly, quarterly, or even paid all at once, depending on the type of policy and the owner’s preference. 

Free look provision: A period during which you can cancel the policy for a full refund of the premium paid, usually 10-30 days.

Policy surrender: This is when the policy is voluntarily cancelled, often in exchange for its cash surrender value.

Underwriting and Policy Application

Underwriting: Underwriting is the process an insurance company uses to evaluate your application. An underwriter processes your insurance application to determine your eligibility for coverage and your rate.

Paramedical examination (paramed exam): During a typical paramedical exam, your height and weight are recorded, your blood is drawn, and urine collected. You may be asked pre-screening questions, and, in some cases, an electrocardiogram (EKG) may be required.

Full (or traditional) underwriting: This is the most thorough type of underwriting with the best. risk or health classes available. Therefore, it has the best potential rates. The application and vetting process typically includes thorough medical questions, a paramedical exam, a motor vehicle report (MVR), medical information bureau (MIB) check, criminal history, prescription data, and health records.

Accelerated underwriting: This is similar to traditional underwriting (above) minus the paramedical exam. Some carriers may require a tele-interview with drill-down questions.

Young people in good health usually qualify for the best life insurance rates

Simplified underwriting: This type of underwriting is less stringent than accelerated and fully underwritten policies, and it may only have “standard” rate classes available. People in good or excellent health will generally get better rates when underwriting is more thorough.

Guaranteed issue: Often used to cover final or burial expenses, a guaranteed issue policy frequently limits the death benefit to no more than $25,000, and is typically graded if you die within the first one to two years of policy issue. This means that during those years, your beneficiaries would only receive a multiple of premiums paid, such as 110%, instead of the full death benefit. No exam or health questions are required. People who apply for guaranteed issue policies are often older and usually not in good health.

Risk class: Underwriters use information, such as your age, occupation, health, and family health history to place you in a risk class or rating category. This category reflects what the insurer thinks is the likelihood that they will have to pay out on your policy. For example, categories with the lowest rates may be called Preferred Plus or Preferred Select, and are usually reserved for non-smokers who are in excellent health.

Types of Life Insurance

Term life insurance: Term life insurance covers the insured for a specific period, typically one to 30 years.

Renewable term life insurance: A renewable term life insurance policy enables you to extend coverage for another term at the end of the policy period, without having to provide evidence of insurability (or go through the underwriting process).

Convertible term life insurance: This type of term life insurance policy allows you to convert some or all of the death benefit to a permanent life insurance policy, which builds a cash value.

Term life insurance is generally much less expensive than permanent life insurance for the same amount of coverage.

Permanent life insurance: Permanent life insurance policies—universal life insurance and whole life insurance—are designed to provide lifetime coverage and feature a tax-advantaged internal cash value account that can be accessed.

Features of Permanent Life Insurance

Cash value: Cash value refers to the internal account value in permanent life insurance policies. It is credited a rate of return that may be fixed at policy issue, based on current interest rates, or tied to stock market returns, depending on the type of policy. Policy owners may be able to borrow or withdraw from it, and it is almost always smaller than the death benefit (except in cases when the policy matures). The cash value is tax-advantaged, and its function is to offset the cost of insurance as the insured person ages—thereby making lifelong coverage more affordable.

In most cases, the cash value is not included as part of the death benefit. 

Cash surrender value: This is the amount the policy owner will receive if a permanent life insurance policy is surrendered (canceled) prior to death. Typically, the cash surrender value comprises the cash value minus any applicable surrender charges and loans.

Surrender period: During the early years of most permanent life insurance policies, a surrender period applies. If you make withdrawals during this period, or if you surrender the policy, a surrender charge (also called a fee or penalty) will be assessed—it usually diminishes each year until the surrender period ends. Surrender fees can be steep and can last up to 20 years.

Policy Options

Dividends: A feature of participating whole life insurance policies, dividends are paid out at the discretion of the insurance company. Generally, they may be received as cash, used to reduce premium payments or a loan balance, be deposited into an account that earns interest, or be used to purchase paid-up additional insurance that increases the death benefit.

Riders: Features of life insurance policies that may be included or available at extra cost are referred to as riders. These include but are not limited to child term riders, accelerated death benefit riders, and disability waiver of premium riders.

Living benefits: A living benefit is a type of rider that typically allows you to access a portion (or all) of the death benefit early if you qualify. Living benefits are usually available for long-term care and terminal, chronic, and critical illnesses. Living benefits reduce the death benefit that your beneficiaries receive. They may or may not be taxable, depending on where you live and the circumstances under which you receive them. A living benefit may also be called an accelerated death benefit

Paid-up additions: Paid-up additions of insurance increase both the death benefit and the cash value of certain whole life insurance policies. They can be thought of as mini insurance policies that can be purchased with dividends on participating whole life insurance policies or through a paid-up additions rider attached to a whole life insurance policy.