Life insurance terms explained

At its core, life insurance is simple: It’s a way to offer your loved ones a sense of financial security when you die. But insurance jargon can get in the way of choosing the right policy. We define the terms that could trip you up when deciding on coverage, selecting riders or combing through your policy’s fine print.

A

• Accelerated death benefit rider. An optional add-on that pays a portion of the death benefit to policyholders diagnosed with a terminal illness. Some insurers pay up to 80% of the death benefit.
• Accidental death and dismemberment (AD&D). A life insurance add-on that pays out if you die or are injured in an accident. If you’re injured or lose a body part or the ability to see, hear or speak, the insurer might offer a partial payout.
• Actual age. This refers to the applicant’s real age. It’s often written as “age at last birthday” or “attained age.”
• Actuary. Someone employed by a life insurance company to calculate premium rates, dividends and other important figures as they relate to risk.
• Actuarial table. Also known as a mortality table, this table shows the probability of a person dying at each age. It’s used by underwriters to determine your risk level.
• Adverse selection. When the buyer doesn’t disclose information about a risk — like a dangerous job — to their provider to get a cheaper rate. This can lead to an insurer raising their rates, making it harder for people to buy coverage.
• Agent. A life insurance company rep that’s licensed to sell and service policies.
• Annual renewable term (ART) life insurance. A term life policy that lasts one year, and can be renewed for a set number of years — usually at a higher premium. It’s ideal for covering short-term or unpredictable life insurance needs.
• Applicant. The person applying for the life insurance policy. The applicant isn’t necessarily the policy owner.
• Attending Physician’s Statement (APS). If an insurer requires more information about your health based on the results of your medical exam or questionnaire, it can request a written summary of your medical history from your doctor or hospital. This document is known as an Attending Physician’s Statement. Your healthcare provider sends the APS directly to the life insurance underwriter. You won’t need to pay for the APS, but it can slow down the application process.
• Avocation. A hobby, such as skydiving or snowboarding. Insurers consider certain avocations to be dangerous, and may raise your rates to compensate for the risk.

B

• Beneficiary. The person, organization or entity who receives the death benefit from your life insurance policy. Designate multiple beneficiaries, change your beneficiaries and allocate a percentage of the death benefit to each.
• Broker. A licensed representative who sells and services insurance policies. Unlike agents, brokers aren’t tied to one company. They can offer quotes from a range of insurance carriers.
• Burial insurance. This policy provides just enough coverage — usually $20,000 or less — to pay for funeral, burial or end-of-life expenses. It’s also known as funeral or final-expense insurance.
• Buy-sell agreement. An agreement to transfer business ownership to the remaining owners when one owner dies or retires. Buy-sell agreements are usually funded by life insurance policies taken out on each owner.

C

• Carrier. An insurance company.
• Cash value. The amount of cash that accumulates over time in permanent life insurance policies. The cash typically earns interest as it grows. Once you’ve built up enough cash value, you can start taking out loans against your policy. You can also surrender your policy and collect the cash.
• Cash surrender value. The amount of money you’ll get if you cash in your permanent life insurance policy. It’s your policy’s current cash value, minus any administrative, surrender and interest fees, as well as outstanding loans.
• Child protection rider. An optional add-on that pays out a death benefit if the policyholder’s child passes away. The coverage varies between providers, but it’s typically limited to a small amount.
• Claim. After a policyholder dies, the beneficiary must notify the insurance company that the death benefit is due. This is the process of “filing a claim.”
• Concealment. The act of deliberating hiding or failing to disclose information to your insurer that could affect your rate or ability to qualify for coverage.
• Contingent beneficiary. Also known as a secondary beneficiary, this is the person or organization who receives the death benefit if the primary beneficiary dies before the policyholder. Naming a contingent beneficiary is optional.
• Coverage amount. The dollar amount of protection you purchased with your policy, such as $250,000 or $1 million.
• Conversion feature. Offered with some term life policies, this feature allows you to convert to permanent life insurance within a certain time frame — usually in the first five years of the policy or before your 60th, 65th or 70th birthday. Depending on your provider, you may pay to add convertibility to your policy.
• Critical illness rider. An optional add-on that pays a lump sum to the policyholder if they’re diagnosed with a critical illness specified in the policy, like heart disease, cancer or stroke. Critical illness can also be a standalone policy.
• Clause. A provision added to a life insurance contract, like a suicide clause.

D

• Death benefit. The amount of money a life insurance policy pays to the beneficiary (or beneficiaries) when the policyholder dies. It’s tax free, and typically paid in a lump sum. more info button
• Decreasing term life insurance. A term life policy with a death benefit that decreases each year. It’s best for covering a loan balance that diminishes over time (like a mortgage), or a depreciating asset.
• Disability income rider. A policy add-on that pays out a monthly benefit if you become disabled and can no longer work. It’s designed to replace a portion of your income.
• Disability insurance. Sold as a rider or standalone policy, disability insurance replaces a percentage of your income if you get hit with a disability and can’t work. It pays monthly premiums for a predetermined period.

E

• Effective date. The date an insurance policy goes into effect.
• Elimination period. Also known as the waiting period, this is the amount of time a policyholder waits before they start receiving benefit payments for a disability or AD&D policy.
• Evidence of insurability (EOI). Also known as the proof of good health, this document confirms your health status and eligibility for coverage.
• Exclusions. The specific circumstances when the benefits from a policy aren’t paid. The exclusions are listed in policy documents, and clarify the extent of coverage.

F

• Face value. See: coverage amount.
• Final beneficiary. The person or organization who will receive the death benefit if both the primary and secondary beneficiaries die before the policyholder. Naming a final beneficiary is not required.
• Final expense life insurance. See: burial insurance.
• First-to-die policy. A type of joint life insurance, this policy pays out when one spouse dies. While it’s designed to give the surviving spouse the money they need to maintain their lifestyle, it leaves them uninsured.
• Financial ratings. The ratings from agencies like AM Best, Moody’s, Fitch and Standard & Poor that indicate an insurance company’s financial strength and claims-paying ability.
• Free look period. The time a policy owner has to trial their policy and return it for a full refund of any premiums paid if they’re not satisfied. The free look period is a legal requirement. It varies between states, but usually lasts 10 to 20 days.

G

• Grace period. The period of time a policy owner has to make up a missed premium payment. It’s typically 30 or 31 days. During the grace period for life insurance, the policy stays in force. This means that if the policyholder dies, the insurance company must pay out the death benefit.
• Group life insurance. An insurance policy issued to a group of people, usually through an employer or association. The employer owns the policy and may pay a portion of your premiums. The coverage offered is usually equivalent to two to five times your annual salary, and you might have the option to increase coverage.
• Guaranteed issue amount. The amount of coverage offered without the need to complete a medical questionnaire. Any additional amount over the guaranteed issue might be subject to health questions.
• Guaranteed issue life insurance. A policy with guaranteed approval. With guaranteed issue policies, the insurer can’t turn you down for coverage or ask any questions about your health. These policies tend to be expensive and limited to small coverage amounts.

H

• Hazard. A circumstance or condition that increases the likelihood of an insurer having to pay out your policy.
• Health questionnaire. A series of approximately 20 Yes/No questions an insurer asks about your health and medical history. The questionnaire is part of most life insurance applications, and it helps insurers to get a clear picture of your health.

I

• Increasing term life insurance. A term life policy with a death benefit that increases each year. The premium rises with the death benefit. Increasing term life insurance is often sold as a supplement to a permanent policy.
• Indexed universal life insurance. A type of permanent policy that’s tied to an equity index, like the S&P 500. It provides lifelong coverage and builds cash value over time. But instead of offering a fixed rate of return, the cash value pays a return based on the performance of that index.
• Insured. The person the life insurance policy is protecting.
• Irrevocable life insurance trust (ILIT). A trust that can’t be changed or revoked once it’s been established. The guarantor creates the trust and chooses a trustee to manage it. When the guarantor dies, the trustee distributes the proceeds of the life insurance policy to the beneficiaries according to the guarantor’s wishes.

K

• Key man insurance. A life insurance policy taken out on an important person within a company — usually an owner or partner. If that person dies, the policy’s proceeds can be used to offset the loss and provide the business with cash flow.

L

• Lapse. The cancellation of an insurance policy due to premium nonpayment.
• Level term life insurance. A type of term life insurance with a set premium and face value. As a result, the death benefit stays the same (or level) until the end of the term.
• Long-term care (LTC) rider. An optional add-on to permanent policies, a LTC rider kicks in when you’re chronically ill and can’t take care of yourself. It lets you pull money from the death benefit to pay for a nursing home or other care expenses. Some providers sell long-term care insurance as a standalone product, too.
• Living benefits. A feature that allows the policyholder to access the benefits of their policy while they’re still alive. It’s often used to describe policies that accumulate cash value, as well as those that offer an accelerated death benefit.

M

• Medical exam. A physical exam required as part of the underwriting process for some policies. The insurer sends a medical professional to your home or office at no charge to you. During the exam, the technician records your height, weight, pulse, blood pressure and cholesterol levels, and take a blood and urine sample. Depending on your health, you might need to take an EKG and give a saliva sample, too.
• Mortgage life insurance. A policy that pays off your remaining mortgage when you die. The proceeds go directly to your lender, which means your beneficiaries won’t receive any money.
• Mutual life insurance company. An insurance company that’s owned by its policyholders. Any profits are distributed to permanent policyholders each year in the form of dividends.

N

• Nonparticipating. A permanent policy that doesn’t earn dividends based on the insurance company’s profits.
• Nonsmoker. A rating assigned to an insurance policy if the insurer determines the policyholder doesn’t use tobacco products. The standards vary between insurers. For example, some carriers will classify you as a nonsmoker if you haven’t touched tobacco in the last year, while others will allow a celebratory cigar once a month.

O

• Open enrollment. The time frame in which an employer who offers insurance benefits allows employees to adjust their plans.

P

• Participating policy. A permanent policy sold by a mutual insurance company that’s eligible to earn dividends.
• Paramedical exam. See: medical exam.
• Payout. The lump sum payment of the proceeds of a life insurance policy.
• Permanent life insurance. A range of policies that offer lifelong coverage, build cash value and become a cash asset over time. Permanent policies include whole life, universal life, variable life and variable universal life.
• Policyholder. The person who owns a life insurance policy.
• Pre-existing condition. A health condition you have received medical advice or treatment for — before applying for insurance coverage.
• Premium. The cost of maintaining a life insurance policy. Your premium reflects your age, gender, occupation and a host of other risk factors, and it’s typically due monthly or annually.
• Primary beneficiary. The person or organization who will receive the proceeds of a life insurance policy first. It’s possible to have multiple primary beneficiaries — as a policyholder, you’ll need to allocate which percentage of the death benefit will go to each.

Q

• Quote. Calculated by an insurance provider, this is the estimated amount of money you’ll pay for coverage.

R

• Rate class. The price category an applicant qualifies for according to the insurance company’s underwriting standards. Some of the common names for rate classes include Preferred Plus, Preferred, Standard and Substandard.
• Reinstatement. A provision that allows a policy to be restored after it’s lapsed. Insurers have their own guidelines about reinstatement, but it’s usually allowed within 31 days of the grace period’s expiration date.
• Return of premium (ROP) rider. An optional add-on that reimburses you for any premiums paid if you outlive your term life policy. It costs extra to add this feature to your policy.
• Rider. An add-on used to customize and enhance your life insurance coverage. You’ll pay an additional fee for most riders, and the options vary between insurance companies.

S

• Secondary beneficiary. See: contingent beneficiary.
• Settlement. The process of paying out a claim on a life insurance policy.
• Simplified issue life insurance. A term or permanent policy that skips the medical exam in favor of a health questionnaire. Approval isn’t guaranteed, but if your policy is approved, it can be issued within hours or days. Simplified issue policies are best for those who need coverage quickly, or have a medical condition that might disqualify them for coverage.
• Standard risk. An applicant who has an average life expectancy, and therefore doesn’t pose a major risk to the insurer.
• Substandard risk. An applicant who has a below average life expectancy, making them riskier in the eyes of an insurer.
• Supplemental life insurance. An additional insurance policy purchased through your employer. It’s designed to enhance your existing coverage. Like group life insurance, it’s usually tied to your place of employment. So, if you switch jobs, you’ll no longer have coverage — unless your policy has portability included.
• Surrender. The act of giving a permanent life insurance policy back to the insurance company. The insurer then pays the policyholder any accumulated cash value, minus any fees and outstanding loans.
• Survivorship life insurance. Also known as second-to-die insurance, this is a joint policy that covers two people. It pays a death benefit when the second person dies, and is often purchased to give heirs the money they need to pay estate taxes.

T

• Term. Also known as the term length, this is the number of years a term life policy is in effect. For example, a policy with a 20-year term will provide coverage for 20 years.
• Term date. The date your term life insurance coverage ends. To put this into context, a 5-year policy expires 5 years and 1 day from its effective date.
• Term life insurance. A straightforward policy that offers coverage for a set period of time, like 10, 20 or 30 years. If the policyholder dies during that time, the beneficiary receives a lump sum death benefit.
• Trust. A legal entity in which you can place assets you’d like to leave to your beneficiaries.

U

• Underwriting. The process an insurer uses to determines how risky you are to insure. Underwriters look at your health history and medical exam results, as well as your age, gender, job and lifestyle. They then evaluate that data and use it to assign a rating class.
• Uninsurable risk. An applicant who is deemed too risky to insure.
• Universal life insurance. A permanent policy that offers flexibility to adjust your premium, coverage and death benefit amount. Like all permanent policies, universal life insurance lasts your entire life and accumulates cash value over time.

V

• Variable life insurance. A permanent policy that gives policyholders the option to invest the policy’s cash value into a number of subaccounts that are managed by the insurer. The cash value returns can fluctuate with the market, making variable life insurance one of the riskier products. Like universal life insurance, it offers flexible premiums and death benefits.
• Variable universal life insurance. A hybrid policy that combines elements of variable and universal life insurance and is typically only available by prospectus. It’s a permanent policy with a cash value component, and the policyholder can choose which subaccounts to invest their money in.

W

• Waiting period. This marks the time between a claim being filed and benefits being paid *out. It applies to disability insurance. Usually, the longer the waiting period, the cheaper the premium.
• Waiver of premium rider. A policy add-on that waives your premiums for a specific period of time — like six months — if you become fully disabled and can’t work. It applies to disability insurance, and the definition of “total disability” can vary between insurers.
• Whole life insurance. The simplest type of permanent life insurance. Whole life policies offer fixed premiums and lifelong coverage, and have a cash value component. They also have the potential to earn dividends, if you’re insured with a mutual company.

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