Whether you’re searching for life insurance or attempting to comprehend an existing policy, knowing the definitions of key life insurance phrases will assist. The following are a few life insurance words categorized broadly by topic.
Policy Basics
Policyholder: The individual who holds the life insurance policy is frequently the insured, but not always; sometimes known as the policy owner.
Beneficiary: The person (or individuals) who receive the death benefit when the insured dies.
Insured: The individual whose life is covered by the policy. If they die while the insurance is still in effect, the beneficiaries get the death benefit.
The death benefit is the sum received by the recipient or beneficiaries of a life insurance policy after the insured dies.
Evidence of insurability: The information you supply to the insurer through your application (including your exam if you take one), as well as the information the firm gathers to assess whether you will be authorized for a policy. The latter may contain your driving history and medical information.
Note
If you cannot offer proof of insurability, you may be able to obtain a guaranteed issue life insurance policy.
Face value: also known as face amount, refers to the amount of death benefit paid by a life insurance policy when the insured dies. Some permanent plans may pay more or less than this sum, based on any loans made against the cash value or paid-up additions to life insurance.
Premium: The amount paid by the owner to maintain the life insurance policy in force. Payments might be made annually, monthly, quarterly, or all at once, depending on the kind of insurance and the owner’s preferences.
Free look provision: A period of 10-30 days during which you can cancel the insurance and receive a full return of the premium paid.
insurance surrender occurs when an insurance is voluntarily terminated, often in exchange for its cash surrender value.
Underwriting and Policy Applications
Underwriting is the procedure that an insurance company takes to assess your application. An underwriter reviews your insurance application to assess your eligibility for coverage and pricing.
A standard paramedical checkup includes measuring your height and weight, drawing blood, and collecting urine. You may be given pre-screening questions, and in certain situations, an electrocardiogram (EKG) may be necessary.
Full (or conventional) underwriting is the most thorough kind of underwriting and includes the finest risk or health classifications possible. Therefore, it has the best prospective rates. The application and vetting procedure usually involves detailed medical questions, a paramedical exam, a motor vehicle report (MVR), a medical information bureau (MIB) check, criminal background, prescription data, and health records.
Accelerated underwriting: This is comparable to regular underwriting (above) but without the paramedical exam. Some carriers may request a tele-interview with detailed questions.1
Note
Young persons in good health typically qualify for the most favorable life insurance premiums.
Simplified underwriting is less severe than expedited or fully underwritten insurance, and it may only provide “standard” rate classes. People with high or outstanding health will often obtain better rates when underwriting is more thorough.
Guaranteed issue: A guaranteed issue policy, which is commonly used to cover funeral or burial expenditures, generally restricts the death benefit to no more than $25,000 and is graded if you die within the first one to two years after policy issue. This implies that during certain years, your beneficiaries would only get a multiple of the premiums paid, such as 110%, rather than the entire death benefit. There are no exams or health questions necessary. People who apply for assured issue plans are typically elderly and not in excellent condition.
Risk class: Underwriters assign you a risk class or rating group based on factors such as your age, employment, health, and family history. This category represents the insurer’s assessment of the possibility that they will have to pay out on your insurance. For example, the categories with the lowest premiums may be labeled Preferred Plus or Preferred Select, and they are often designated for nonsmokers in good health.
Types of Life Insurance
Term life insurance provides coverage to the insured for a set period of time, usually one to thirty years.
A renewable term life insurance policy allows you to renew coverage for another term at the conclusion of the policy period without having to present proof of insurability.
Convertible term life insurance: This form of term life insurance policy allows you to transfer some or all of the death benefit to a permanent life insurance policy, resulting in cash value.
Term life insurance often costs less than permanent life insurance for the same level of coverage.
Permanent life insurance policies—universal life insurance and whole life insurance—are intended to offer lifelong coverage and include a tax-advantaged internal cash value account that may be accessed.
Features of Permanent Life Insurance:
Cash value is the internal account value in permanent life insurance plans. Depending on the kind of insurance, it is credited with a rate of return that is fixed at the time of policy issuance, based on current interest rates, or linked to stock market returns. Policyholders may borrow or withdraw from it, although the amount is usually always less than the death benefit (unless when the policy matures). The cash value is tax-advantaged and serves to offset the cost of insurance as the insured ages, making lifelong coverage more reasonable.
Most death benefits do not contain financial value.
The cash surrender value is the amount received by the policy owner if a permanent life insurance policy is surrendered (canceled) before to death. Typically, the cash surrender value equals the cash value less any applicable surrender costs and loans.
Most permanent life insurance policies have a surrender period during the first few years of coverage. If you make withdrawals during this time or surrender the policy, you will be charged a surrender charge (also known as a fee or penalty), which normally decreases year after year until the surrender term expires. Surrender costs can be high and extend up to 20 years.
Policy Options
Dividends: As a feature of participating whole life insurance contracts, dividends are paid out at the insurance company’s discretion. Generally, they can be received as cash, used to lower premium payments or loan balances, transferred into an interest-bearing account, or used to acquire paid-up supplementary insurance that raises the death benefit.
Riders are life insurance policy features that are either included or available at an additional fee. These include, but are not limited to, child term riders, expedited death benefit riders, and disability waiver premium riders.
Living benefits: A living benefit is a sort of rider that lets you to obtain a portion (or all) of your death benefit early if you meet the requirements. Living benefits are often offered for long-term care, as well as terminal, chronic, and urgent conditions. Living benefits lower the death benefit that your beneficiaries will get. They may or may not be taxed, depending on where you live and the circumstances surrounding your receipt. A living benefit may also be known as an accelerated death benefit.
Paid-up additions raise the death benefit as well as the cash value of certain whole life insurance policies. They may be considered of as small insurance policies that can be acquired using profits from participating whole life insurance policies or a paid-up additions rider attached to a whole life insurance policy.
