Life Insurance Terminology: 32 Important Terms to Know
Monday, 5 February 2024
In an unpredictable world, life insurance acts as a safety net and offers a measure of financial security in the face of life's uncertainties. However, the complex world of insurance uses many specialized terms and technical jargon that the average person might need to be more familiar with.
That’s why understanding these terms should be a priority for anyone looking to make an informed decision about their coverage. In this blog, we’ll provide an overview of what life insurance is used for and define various examples of life insurance terminology that may arise while shopping for a policy. Keep reading to learn more about some of the most important life insurance definitions so that you can protect your family’s future with confidence.
What is Life Insurance Used For?
Life insurance serves as a powerful financial instrument designed to protect and support individuals and their families during various stages of life. Understanding its purpose is essential for making informed decisions about coverage. Here's an overview of what life insurance is, who it benefits, and its applications.
Financial Protection for Loved Ones
In the event of your passing, your life insurance policy pays out a death benefit to your designated beneficiaries. This financial cushion helps them cover immediate expenses, such as funeral costs, outstanding debts, and daily living expenses, ensuring that your family's financial well-being is protected.
One key use of life insurance is income replacement. If you are a primary breadwinner, your sudden absence could leave your family facing financial hardships. Life insurance ensures your loved ones can maintain their living standards by replacing lost income and covering mortgage payments, educational expenses, and other ongoing financial obligations.
Whether you still have to pay the mortgage on your home, have a balance on a car loan, or have other financial liabilities, the death benefit from a life insurance policy can be utilized to pay off these debts, preventing them from burdening your family.
Life insurance plays a crucial role in estate planning. It can provide liquidity to cover estate taxes and other expenses, ensuring that your assets are distributed according to your wishes. This facilitates a smoother transfer of wealth to the next generation and minimizes the financial impact on your heirs.
Life insurance is a strategic tool for business owners to ensure business continuity in the face of unexpected events. The policyholder can use life insurance to fund buy-sell agreements, repay business loans, or provide financial support to the business in the absence of a key individual.
Supplemental Retirement Income
Certain types of life insurance, such as cash-value policies, can accumulate money over time. These funds can then be accessed during your lifetime, providing an additional source of retirement income or paying for more significant expenses like a home renovation or your child’s education.
32 Important Life Insurance Definitions
Now that we have established the many functions of life insurance, it’s time to dive into some common examples of life insurance terminology you might encounter when reviewing your coverage options.
Accelerated Death Benefit
This allows policyholders facing a terminal illness or specific medical conditions to access a portion of their life insurance's death benefit before passing away. It provides financial assistance during challenging times, such as covering medical expenses or enhancing the quality of life in the final stages.
The beneficiary is the person or entity the policyholder chooses to receive the death benefit upon the insured's passing. This designation ensures that the intended recipients receive the financial protection the life insurance policy provides.
This represents the accumulated savings within a permanent life insurance policy. It is an investment form allowing policyholders to access funds through withdrawals or policy loans. The cash value can provide financial flexibility and may grow over time, depending on the policy type.
The contestability period is a specific timeframe, usually the initial two years of a policy, during which the insurance company can investigate and contest the accuracy of information provided in the policy application. After this period, the insurer typically cannot challenge the policy based on misinformation.
This type of insurance allows policyholders to change their term policy to a permanent life insurance policy without undergoing a new medical examination. This flexibility provides individuals with the option to adapt their coverage to changing life circumstances.
Should the insured individual pass away, the insurance provider will pay a sum of money, known as the death benefit, to the beneficiaries listed within the policy.
A dividend is an annual payment that some policyholders can receive from their insurance provider that includes part of the premiums paid for your policy. The amount received is based on the performance of the insurance provider in a given year.
As the name suggests, exclusions are specific conditions or circumstances listed in the life insurance policy that are not covered by the insurance. Policyholders must be aware of these exclusions to understand the limitations of their coverage.
The face amount is the initial death benefit specified in a life insurance policy. This amount is paid to the beneficiaries upon the insured's death.
Final Expense Insurance
This form of insurance insurance is designed to cover the costs associated with a person's funeral, burial, and related expenses. It ensures that these financial burdens do not fall on the deceased's family, providing a practical and compassionate form of coverage.
This is a specified duration of time in which a policyholder can make a late premium payment without facing any penalties or a lapse in coverage.
Guaranteed-issue life insurance is a policy that does not require the applicant to undergo a medical examination or provide detailed health information. It is often suitable for individuals needing help obtaining coverage through traditional underwriting methods.
The incontestability clause limits the insurance company's ability to contest the policy's validity or deny a claim after a specified period, typically two years. This clause provides a level of assurance to the policyholder that the policy will not be subject to constant challenges once it has been in force for the designated period.
This refers to the individual whose life is covered by the policy.
A lapse occurs when a policy terminates due to non-payment of premiums. If a policy lapses, the policyholder will no longer have coverage.
Nonforfeiture options are choices available to a policyholder when a permanent life insurance policy is surrendered or lapses. These options may include receiving the cash value or converting it into a reduced paid-up policy.
Permanent Life Insurance Definition
Permanent insurance provides coverage for the entire lifetime of the insured. It includes a cash value component, and policyholders may access this component through withdrawals or policy loans.
In some cases, a policyholder may borrow against the cash value of a permanent life insurance policy. The loan is typically repaid with interest, providing a source of funds for various financial needs.
The policy term is the duration for which the life insurance policy provides coverage. For example, the term could be 10 or 20 years or until the insured individual reaches a specific age.
This individual owns the life insurance policy. They are responsible for paying premiums and determining beneficiaries. They also have the power to make updates to the policy.
The premium is the periodic payment made by the policyholder to the insurance company to keep the life insurance policy in force. The amount and frequency of premium payments depend on the policy terms.
Premium Payment Period
This term refers to the duration or frequency the policyholder is required to pay premiums so that their policy remains in force. Typically, premiums are paid annually on a regular schedule, such as monthly. It is important to adhere to this schedule to maintain continuous coverage.
Renewable term life insurance allows policyholders to renew their term policy for additional terms without undergoing a new medical examination. While this provides flexibility, premiums may increase with each renewal.
Also known as endorsements, these allow policyholders to tailor their specific needs by adding optional coverages such as critical illness or disability.
Providers conduct risk classification to assess and categorize individuals based on their health, lifestyle, and other factors to determine the level of risk associated with insuring them and calculate appropriate premium rates for life insurance.
The surrender value is the cash value a policyholder receives when cancelling a permanent life insurance policy. This value represents the accumulated savings within the policy minus any applicable surrender charges.
Definition of Term Life Insurance
Term insurance provides coverage for a specified period, known as the term length. Unlike permanent insurance, it does not accumulate cash value and is designed to provide affordable coverage for a specific timeframe.
The term length is the duration for which a term life insurance policy provides coverage. Common terms include 10, 20, or 30 years, and the death benefit is payable if the insured passes away during this period.
An underwriter assesses risks and determines appropriate premium rates and terms for life insurance policies.
Underwriting is a process that involves analyzing various factors, including medical history and lifestyle, to evaluate an applicant's insurability.
Universal Life Insurance Explained
Universal life insurance is a type of permanent life insurance that provides flexibility in premium payments and death benefits. It includes a cash value component that can earn interest, and policyholders can adjust their coverage as needed.
Definition of Whole Life Insurance
Whole life insurance is a type of permanent life insurance that provides coverage for the insured's entire lifetime. It features fixed premiums, a guaranteed death benefit, and a cash value component that grows over time. Whole life insurance offers long-term financial security and may include dividends based on the insurer's performance.
Life Insurance Made Easy with BIG
Whether it's securing the financial future of your loved ones, settling debts, planning your estate, ensuring business continuity, or building a cash reserve, life insurance can be tailored to meet diverse financial needs. Understanding its many applications empowers individuals to make informed decisions that align with their unique circumstances and financial goals.
While this blog provides insight into many examples of life insurance terminology, it’s completely understandable if you still don’t understand all the ins and outs of this subject. Insurance is very intricate, so getting caught up to speed may take some time. If you would like to learn more about any of these terms, explore whether life insurance makes sense for your situation, or would like to request a quote and compare your options, contact your nearest BIG branch, and one of our life insurance experts will be happy to assist you.