Life insurance provides financial protection for you and your loved ones. It helps ensure that your family is taken care of in the event of your untimely death. However, buying the right life insurance policy can be quite challenging, particularly if you don’t understand the terms being used in the industry. In this article, we’ll explain some of the key life insurance terms you should know before purchasing a policy.
What is a Life Insurance Glossary?
Definition of Life Insurance Terms
A life insurance glossary is a list of terms and their definitions used in the life insurance industry. It helps familiarize individuals with the jargon commonly used by insurance companies, agents, and brokers. The terms in the glossary may include policy definitions, underwriting terms, payout terms, and explanations of different policy features, among others.
Why is a Glossary of Life Insurance Terms Useful?
The language used in the life insurance industry can be quite technical and complex. A glossary simplifies these terms, making it easier for the buyer to understand and compare policies. It also helps avoid confusion or misunderstandings between the policyholder and the insurance company or agent, particularly during claims.
How to Use a Life Insurance Glossary?
A glossary of life insurance terms can be found online, or it may be given to you by your insurance agent. Each term in the glossary is accompanied by a definition and sometimes an illustration of how it works. It is essential to understand these terms before purchasing life insurance because it is a contract, and any misinterpretation of its terms can cause grave consequences.
What are the Terms to Know Before Purchasing a Life Insurance Policy?
What is a Death Benefit?
The death benefit is the payment your beneficiaries will receive from the insurance company in the event of your death. The amount of the death benefit is the sum you and the insurer agreed upon when you signed the policy. It can be paid out as a lump sum or in regular installments.
What is a Premium?
A premium is the amount of money you pay to the insurance company to keep your life insurance policy in force. It can be paid monthly, quarterly, yearly, or in a lump sum depending on the policy. The amount of the premium is determined by several factors, including your age, health status, coverage amount, and the type of policy you select.
What is Cash Value?
Cash value is the amount of money that accumulates over time in a permanent life insurance policy. It is a savings component that the policy owner can borrow against or withdraw. Cash value accumulates tax-deferred, which means that you don’t need to pay taxes on it until you withdraw it. Note that borrowing against your policy’s cash value will reduce the policy’s death benefit and may generate interest.
What are the Different Types of Life Insurance?
What is Term Life Insurance?
Term life insurance is a type of policy that provides coverage for a specified period, typically 10, 15, 20, or 30 years. It is often more affordable than permanent life insurance because it only pays out a death benefit if the policyholder dies during the policy period. It doesn’t accumulate cash value. You can convert a term life insurance policy into a permanent policy, but you will have to pay a higher premium.
What is Whole Life Insurance?
Whole life insurance is a type of permanent life insurance policy that provides coverage for your entire life. It is more expensive than term life insurance because it has a savings component that accumulates cash value. Whole life policies have level premiums, meaning that the cost of insurance remains the same throughout the policy’s life, and the death benefit is guaranteed as long as you pay the premium.
What is Universal Life Insurance?
Universal life insurance is another type of permanent life insurance policy that provides flexibility in premium payments and death benefit amounts. It has a savings component that accumulates cash value, and you can adjust the premium and death benefit amounts according to your needs. Universal life insurance policies come in several forms, including variable universal life and indexed universal life, each with its unique features.
Who are the Key Terms Involved in a Life Insurance Policy?
Who is the Policyholder?
The policyholder is the individual who owns the life insurance policy. They pay premiums to keep the policy active and receive the policy’s benefits if they meet its outlined conditions and requirements.
Who is the Beneficiary?
A beneficiary is the person or entity who will receive the death benefit from the policy should the policyholder die. The beneficiary is designated by the policyholder, and they can name one or more beneficiaries, as well as change them at any time.
Who is the Insured Person?
The insured person is the individual whose life the policy covers. It’s usually the policyholder, but it can be someone else if the policy is life insurance on another person.
What are Other Important Life Insurance Terms to be Familiar With?
What is a Lapsed Policy?
A policy lapses when the policyholder fails to pay the premium. A lapsed policy means that the policy is no longer in force, and the death benefit is no longer payable unless the policyholder chooses to reinstate the policy. Reinstatement may require evidence of insurability and payment of past due amounts.
What is a Dividend?
Life insurance policies that have a savings component often pay out dividends to policyholders. Dividends are a portion of the insurer’s profits that are distributed to policyholders either as a cash amount or a reduction in premiums. Not all policies offer dividends, and their availability and amounts may also vary according to the insurer’s performance.
What is a Grace Period?
A grace period is a period of time after a missed premium payment, during which the policy remains in force. It gives the policyholder a chance to pay the premium without penalty and maintain their coverage. The grace period is usually 30 days for traditional policies but may vary for other policies. It’s also important to note that coverage during the grace period is not automatic, and the policyholder must pay the premium before the end of the grace period to keep their coverage.
Life insurance is a contract between you and the insurer, and understanding life insurance terms is crucial. Knowing the different types of life insurance policies, the roles of the policyholder, beneficiary, and insured, and other important terms like lapsed policy, dividend, and grace period can make all the difference in finding the right policy for your needs. A glossary of life insurance terms can help simplify the language, but it’s important to consult an insurance agent to better understand the terms and features of each policy before applying for a life insurance plan.
Q: What is a death benefit?
A: A death benefit is the amount of money paid out to the beneficiary of a life insurance policy upon the death of the insured.
Q: What is a premium?
A: A premium is the amount of money paid by the policyholder to the insurance company for coverage, usually paid monthly or annually.
Q: What is cash value?
A: Cash value is the amount of money that accumulates over time in some types of life insurance policies, which can be borrowed against or used to pay premiums.
Q: What does it mean to insure someone?
A: Insuring someone means that a life insurance policy has been taken out on that person, which will pay out a death benefit to the designated beneficiary upon their death.
Q: What is term life insurance?
A: Term life insurance provides coverage for a specific period of time, typically 10-30 years, and pays out a death benefit if the insured dies during that time period.
Q: Who is a beneficiary?
A: A beneficiary is the person or entity designated to receive the death benefit from a life insurance policy upon the death of the insured.
Q: What is the difference between term life insurance and whole life insurance?
A: Term life insurance provides coverage for a specific period of time, while whole life insurance provides coverage for the insured’s entire life and accumulates cash value over time.
Q: What is universal life insurance?
A: Universal life insurance is a type of whole life insurance that allows the policyholder to adjust the premium and death benefit amount over time.
Q: Who is an insurer?
A: An insurer is a company that provides insurance policies and pays out claims to the designated beneficiaries.
Q: What is a grace period?
A: A grace period is a specific amount of time after a missed premium payment, during which the policy remains in force without penalty.
Q: What happens if a policy lapses?
A: If a policy lapses, it means that coverage has ended due to missed premium payments. In some cases, the policyholder may be able to reinstate the policy by paying back premiums and any fees.
Sanela is a seasoned insurance expert with over 10 years of experience in the industry. Holding the title of Chief Insurance Analyst, he has a deep understanding of policy intricacies and market trends. Sanela's passion lies in educating consumers about smart insurance choices, and he's delighted to share his insights.