Life insurance defined: Terminology to know
If you've started searching for information on life insurance, but quickly been confronted by terms you don't understand, don't worry, you’re not alone! Life insurance terminology can definitely be confusing at times. Below are some important life insurance terms and definitions to help you understand life insurance and how it works.
By familiarizing yourself with the terms below, you’ll be better able to make more informed decisions when shopping for life insurance coverage.
Glossary of Life Insurance Terms
Accelerated Death Benefit Rider
With this policy add-on, the death benefit can be paid prior to the insured's death if he or she is facing a qualifying terminal illness.
Actuary
A specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics.
Agent
A licensed representative who sells insurance policies in either of two classifications:
- An independent agent represents multiple insurance companies and services clients by searching the market for the most advantageous price for the most coverage.
- A career agent represents only one company and sells only its policies.
Assets
Insurance company assets refer to "all the available properties of every kind or possession of an insurance company that might be used to pay its debts." This can mean bonds, stocks, real estate, debts owed to the company and even office furniture. The amount of assets a company has is usually a reflection on their financial strength.
Attained Age
A way of calculating an applicant's insurance age. This method uses the insured's actual age and is sometimes called Age Last Birthday or Actual Age.
Application
Form(s) that the proposed insured is required to complete and submit to the insurance company when they are requesting life insurance coverage.
Attending Physician Statement (APS)
Information provided by a proposed insured's physician covering medical history and results of medical examinations. It is used to determine the appropriate underwriting classification for the proposed insured.
Beneficiary
The person or party named by the owner of a life insurance policy to receive the policy benefit.
Broker
A licensed representative who sells insurance policies. Brokers search the marketplace for their clients and can sell products from multiple insurance companies.
Capital
Equity of shareholders of a stock insurance company. The company's capital and surplus are measured by the difference between its assets and its liabilities. This "cushion" protects the interests of the company's policyowners as well as providing a source for dividends to shareholders and investments in new ventures.
Cash Value
Some life insurance policies, usually permanent types like whole life, universal life or variable universal life insurance, can accumulate money in a cash value account. In addition to paying for insurance coverage, a portion of your premium goes toward a cash value account that grows tax-deferred over time.
Children’s Rider
This optional policy add-on provides life insurance coverage for families with children.
Claim
A formal request to the insurance company that payment of the benefit is due under the terms of an inforce insurance policy.
Commission
Fee paid to an insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods.
Contingent Beneficiary
The party designated to receive proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured.
Convertible Term Insurance Policy
A term life insurance policy that gives the policy owner the right to convert (or exchange) the policy to a permanent plan of insurance.
Coverage
The scope of protection provided under an insurance policy. In life insurance, living and death benefits are listed.
Convertible
Term life insurance coverage that can be converted into permanent insurance regardless of an insured's physical condition and without a medical examination. The individual cannot be denied coverage or charged an additional premium on the permanent plan for any health problems.
Death Benefit
The amount of money that the insurance company will pay the beneficiary in the event of the insured’s death.
Evidence of Insurability
Proof that a person is an insurable risk.
Face Amount
The amount the policy is worth. It’s linked to the death benefit because it’s the amount of money that the insurance company will pay the beneficiary in the event of the insured’s death.
Final Expenses
End-of-life expenses such as funeral costs, medical bills or other outstanding debt.
Free Look Provision
An individual life insurance and annuity provision that gives the policy owner a stated time, usually 30 days after the policy is delivered, in which to cancel the policy and receive a full refund on the initial premium payment.
Grace Period
The length of time (usually 31 days for term policies) after a premium is due and unpaid during which the policy, including all riders, remains in force. If a premium is paid during the grace period, the premium is considered to have been paid on time.
Group Life Insurance Coverage
Insurance products available to people in a group, typically through their employer.
Guaranteed Issue
An applicant cannot be turned down when applying, even if he/she is in poor health.
Guaranteed Premiums
This means that your premiums won't go up, unless you alter your policy, so you'll always know how much you're paying.
Incontestability Provision
A life insurance provision that limits the time within which the insurer has the right to void the contract on the ground of material misrepresentation in the application for the policy.
Insured
The individual covered by the insurance policy.
Irrevocable Beneficiary
A life insurance policy beneficiary who has a vested interest in the policy proceeds even during the insured’s lifetime because the policy owner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.
Insurable Interest
The interest an insurance policy beneficiary has in the risk that is insured. The beneficiary of a life insurance policy has an insurable interest in the insured when the beneficiary is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies.
Lapse
The termination of a policy due to non-payment of premium.
Level Term Life Insurance
A term life insurance where premiums are guaranteed to stay the same throughout the duration of the policy.
Life Insurance
A contract between an individual and an insurance company where the insurer agrees to a pay a designated beneficiary a sum of money if the insured dies.
Material Misrepresentation
A misrepresentation that would affect the insurance company’s evaluation of a proposed insured.
Medical Exam
A short assessment completed by a medical professional that can be completed at the applicant’s home, place of work, etc. This no-cost exam is sometimes required by the insurance company before getting coverage. Also referred to as a paramedical or paramed exam.
Mortality Tables
Charts that show the death rates of a particular group of lives at certain ages, derived from statistics that count deaths in a population by age compared to those still alive at that age.
Non-Tobacco/Non-Smoker
A risk class given to every insurance policy in which the insured has been classified as a non-user of tobacco and/or nicotine products.
Payor
The person paying for the insurance policy.
Permanent Life Insurance
Life insurance that provides coverage throughout the insured’s lifetime and may also provide a cash value.
Policy
The written contract of insurance, or in which the rights and duties of the insurer and the insured are set out.
Policy Anniversary
As a general rule, the date on which coverage under an insurance policy became effective.
Premium
The price of insurance protection for a specified risk for a specified period of time.
Proposed Insured
A person applying for life insurance coverage.
Quote
The estimated premium amount for an applicant based on age, gender, coverage amount, etc.
Renewal
The automatic re-establishment of inforce status effected by the payment of another premium.
Rider
An amendment to an insurance policy that becomes part of the insurance contract and either expands or limits the benefits payable under the contract.
Risk Class
Risk class, in insurance underwriting, is a grouping of insureds with a similar level of risk. Typical underwriting classifications are preferred, standard and substandard, smoking and nonsmoking, male and female. Also can be called rating class or underwriting class.
Section 1035 Exchange
This refers to a part of the Internal Revenue Code that allows owners to replace a life insurance or annuity policy without creating a taxable event.
Section 7702
Part of the Internal Revenue Code that defines the conditions a life policy must satisfy to qualify as a life insurance contract, which has tax advantages.
Surrender / Surrender Charge
Fee charged to a policyholder when a life insurance policy or annuity is surrendered for its cash value. This fee reflects expenses the insurance company incurs by placing the policy on its books, and subsequent administrative expenses.
Term Life Insurance
Life insurance that provides protection for a specified period of time. Common policy periods are 10, 15, 20 and 30 years. Term policies usually do not build up any of the nonforfeiture values associated with permanent life policies.
Underwriter
The individual trained in evaluating risks and determining rates and coverages for them.
Underwriting
The process of selecting risks for insurance and classifying them according to their degrees of insurability so that the appropriate rates may be assigned. The process also includes rejection of those risks that do not qualify.
Universal Life Insurance
A life insurance policy that allows flexibility of premium payments which may affect the benefit to be paid and/or the length of time coverage is in force.
Variable Life Insurance
A form of life insurance whose cash value and/or face value fluctuates depending upon the value, securities or equity products supporting the policy, invested in funds called separate accounts, the sum of which comprise the cash value of the policy.
Variable Universal Life Insurance
A combination of the features of variable life insurance and universal life insurance under the same contract. Benefits are variable based on the value of underlying separate accounts, and premiums and benefits are adjustable at the option of the policyholder.
Wavier of Premium
A policy add-on that will waive the insurance policy premium if the insured is disabled for six months. Once the disability ends, premium payments resume. What is considered a disability is determined by each insurance carrier.
Whole Life Insurance
A kind of permanent life insurance which provides a level death benefit upon the insured's death and builds cash value over the life of the policy.