Understanding life insurance can be easier when you’re familiar with the language. Whether you’re buying a policy or reviewing coverage, these key terms will help you make informed decisions and avoid confusion.
1. Beneficiary
A beneficiary is the person or entity you name to receive the death benefit from your life insurance policy. You can designate multiple beneficiaries and assign different percentage amounts to each.
2. Death Benefit
This is the amount paid to your beneficiary after you pass away. The death benefit is typically tax-free and is meant to help cover expenses or provide financial support.
3. Premium
Your premium is the regular payment (monthly, quarterly, or annually) you make to keep your policy active. Rates vary depending on the type of policy, coverage amount, age, and health.
4. Policyholder
The person who owns the life insurance policy and is responsible for paying premiums. The policyholder may or may not be the insured person.
5. Insured
The insured is the individual whose life is covered by the policy. If the insured passes away during the coverage period, the insurer pays out the death benefit.
6. Underwriting
Underwriting is the process insurers use to evaluate risk and determine eligibility and premium costs. It often includes a review of medical history, lifestyle, and occupation.
7. Term Life Insurance
A policy that provides coverage for a specific period (e.g., 10, 20, or 30 years). If the insured passes away during the term, the death benefit is paid out. If the term ends while the insured is alive, coverage typically ends unless renewed.
8. Whole Life Insurance
A type of permanent insurance that lasts for your entire life, as long as premiums are paid. It often includes a cash value component that grows over time.
9. Cash Value
A feature of permanent policies that builds savings you can borrow against or use during your lifetime. It grows tax-deferred and can be accessed through policy loans or withdrawals.
10. Rider
An optional add-on to a life insurance policy that provides additional benefits or coverage. Common riders include accidental death, waiver of premium, or child term coverage.
11. Contestability Period
A limited time (typically the first two years of the policy) during which the insurer can review and potentially deny a claim due to misrepresentation or omission in the application.
12. Lapse
A policy lapses when the policyholder misses payments and coverage ends. Some policies offer a grace period to make up missed payments before the lapse becomes permanent.
13. Grace Period
A short time (usually 30 or 31 days) after a missed premium payment during which the policy remains active. If payment is made during this period, coverage continues uninterrupted.
14. Face Amount
The face amount is the original death benefit of the policy as stated in the contract. This amount can change depending on policy loans or rider adjustments.
15. Surrender Value
The amount the insurer pays if you cancel a permanent policy before death. This value is often less than the total premiums paid, especially in early years of the policy.
Final Thought
Knowing the right terms can help you ask better questions and understand your options clearly. Whether you’re shopping for life insurance or reviewing an existing policy, this glossary will give you a strong foundation.
