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Life Insurance Terms and Definitions [Top 44 Terms to Know]

life insurance terms and definitions

In today’s world, there are numerous different life insurance companies and perhaps even more people trying to give you advice on what you should be doing.

On our site, we like to provide simple advice to make life insurance more accessible to all but there are still some life insurance keywords that come up time and time again that need defined.

Going along with our mission, we have compiled a list of life insurance terms and definitions containing some of the most used words within this industry to help you increase your vocabulary, and your knowledge as a result.

Life Insurance Definitions

Life Insurance

The word life insurance connotes many feelings. For some, it makes them feel good because they have coverage in place to protect a loved one if they died prematurely. For others, the word “life insurance” causes their stomach to turn because they don’t own it, they don’t want to think about the possibility of dying, and they don’t want to spend money on it.Whichever category you fall into, defining the word life insurance is not easy because of the different feelings it connotes  but we will give it our best shot!

Life insurance should more properly be called death insurance. Its primary objective is to provide cash to a beneficiary at the death of the insured. The parties to life insurance are the owner, the insured, the company and the beneficiary.

When one has people relying on them and their income or services, they might take out a life insurance policy to keep all involved protected. As a legal contract between the policyholder and the insurance company, a premium will be paid each month to keep one or more parties insured in case of death. When death occurs, a death benefit will be paid to the beneficiary of the policy. For more, check out what is life insurance article where we discuss the many facets that make up life insurance.

Life Insurance Quotes

The term “quote” refers to the preliminary offer from a company to start a life insurance policy. It is prudent to take any life insurance quotes with a grain of salt because, unless you are choosing a simplified issue product, a medical exam will need to be completed in order for your original quote to be approved with the carrier. This is why we always recommend talking with a professionals, such as the pros at IBUSA, for a quote because we can properly assess your health and lifestyle and focus on giving you an accurate quote, rather than simply quoting you the lowest price offer to try and gain your business.

Term Life Insurance

Within life insurance, there are many different types of life insurance available.

With a term life insurance policy, one is covered for a set amount of time and will make payments to the insurance company. The term of the policy can be anywhere from annual renewable term, 5, 10, 15 20, 25 and 30 year terms. There is even a company that allows you to select a term length from 16 years to 30 years. Perhaps more simple and basic than other options, the death benefit will be paid upon death. If the policy is outlived, the holder must renew, be without, or find a new policy moving forward.

Simplified Issue Life Insurance

Simplified issue would be defined as a simplified process for obtaining life insurance where no medical exam is required. Check out a list of our top simplified issue life insurance companies to get more information on this topic.

Although no medical examination is required, there will still be some questions that need answering, as well as background check conducted. All in all, with today’s Big Data and innovation with policies, simplified issue life insurance is a great method for obtaining reasonably priced coverage without a blood draw or urine sample.

Fully Underwritten

Even though we have seen an increase in simplified issue policies, many more traditional companies continue to require a policy be fully underwritten. Fully underwritten defined would require a complete paramedical exam, including blood draw and urine sample. Also, the examiner will measure your height and weight. For larger cases and older clients, an EKG may also be conducted. Further, a background check will be done, which requires a check on any prescriptions, past medical history, as well as DMV records.

Guaranteed Issue Life Insurance

When setting up life insurance for the first time, one would normally have to participate in a medical examination as well as answering questions regarding family and medical history. With guaranteed issue insurance, there is absolutely no way that an application can be declined because there is none of the above. As the insurance company doesn’t get full details, premiums will be higher and there is normally a time period that must pass before a death benefit will be awarded.

Life Insurance Policy

The policy is the contract between the owner of the policy and the carrier. It holds all the terms and conditions of the agreement between the two parties – insurance company and policyholder. As a legal contract binding the two together, the policy ensures that the insurance company receives the premium and the beneficiary receives the death benefit upon the passing of the insured.

Permanent Life Insurance

Rather than being covered for a set amount of time, a permanent life insurance policy will last until death. Assuming that the conditions are met and the premiums are paid over a set period of time, a death benefit will be paid upon the death of the insured. Unlike term life insurance, most permanent options will have a cash value that builds alongside the death benefit. The two main types of permanent life insurance are whole life and universal life.

Whole Life Insurance

When people use the term ‘life insurance’, what they mean is ordinary life insurance or whole life insurance. Whole life insurance covers the insured for his or her whole life. Whole life insurance offers certain guarantees, such as guaranteed death benefit, guaranteed fixed premium, guaranteed cash value, and guaranteed interest rate. Plus, participating whole life insurance offers a return of premium in the form of dividends. The cash value in a whole life policy can be borrowed against, and used for paying off debts, starting a business, buying investments, and supplemental retirement income.

Universal Life Insurance

Primarily a cash value life insurance, this is only really found within the United States and any payments that go above and beyond the premium will be added to the cash value of the policy. Each month, the cash value will increase with interest. Normally, universal life insurance can be split into three categories – single premium, fixed premium, and flexible premium.

Variable Life Insurance

Again, this will build in cash value over time but there is an option to invest this cash within different accounts much like mutual funds. After being invested in stocks or bond markets, there is a risk versus return factor in play for this type of life insurance.

Cash Value Life Insurance

The purest form of life insurance is cash value life insurance. If there is no cash value available then policy should more correctly be called death insurance. However, cash value provides a benefit in life and death. The benefit of cash value is it can be borrowed against in the form of a policy loan. A policy loan is a tax free way to pay for various things, such as personal financing, paying off debt, retirement, or investing. 

Cash surrender value

Cash surrender occurs when the cash value in a life insurance policy is given to the policyholder due to cancellation of the contract for any reason. Once the cash value has been received, the policyholder has surrendered all rights to any future benefits from the agreement. While this exists on most permanent policies, term life insurance only has cash value when it contains a ROP rider.

Supplemental Life Insurance

Often, companies will offer supplemental life insurance to their employees and this will cover around two or three times the salary of the employee. As well as not necessarily requiring a medical examination, this insurance provides extra coverage on top of what may already be owned by the individual. Depending on the company, the insurance offered may differ from one individual to the next due to their circumstances.

Group Life Insurance

Instead of offering individual insurance to employees, other companies will use group life insurance which covers a group of people all under one contract. Whilst the company or even a labor organization becomes the policyholder, all employees under the umbrella of the business will receive the coverage. Although it is generally less than individual protection, it can still be good to have.

Survivorship Life Insurance

Also known as ‘Second-to-Die’, survivorship life insurance is a variable type of policy that holds two individuals within. Normally a married couple, the death benefit will only go to the beneficiary after both parties are deceased. With this in mind, it is usually used within estate planning to ensure the future of children or any other loved ones.

Split Dollar Life Insurance

Sometimes, businesses like to rewards executives or long-term employees and this can be achieved with split dollar insurance plans. As the name suggests, the life insurance costs will be split between employer and employee which ultimately leads to a split of cash value and even death benefit. In terms of the policy itself, this can be any with cash value including second-to-die, universal, and whole life.

Key Man Life Insurance

Normally the owner, key man life insurance is a policy that is taken for an important figure with the organization. If the business absolutely needs this person or these people and the company would struggle or even fail without them, this insurance is required. As well as the paying the premiums, the company will be the beneficiary of the policy. If the insured passes away, the company would receive the payoff.

Renewable Term Life Insurance

Essentially the same as term life insurance, this one has one major difference in the shape of a clause. At any point during the contract, the term can be extended without having to re-qualify for coverage. As well as ensuring that the premiums are all paid on time, the beneficiary must also pay a renewal premium.

Accidental Life Insurance

Compared with other options we have gone through, this one has the potential to be the cheapest because it only pays out for accidental deaths. Considering accidental deaths make up less than 5% of all deaths within the United States, insurance companies rarely make a loss on these types of policies. However, it can be useful for those who work in dangerous industries.

Portability Life Insurance

Often, the loss or transition of jobs can cause hassle when it comes to life insurance but portability life insurance ensures that it remains unaffected by huge changes in a career. Rather than being tied to one company, portability insurance will move as you move around from one job to the next.

Life Insurance Face Value or Death Benefit

Over time, the face value will grow because it basically means the value of the death benefit at any given time. Stated as a monetary value, this is the amount that will be awarded to the beneficiary after the insured passes away. If the insured does happen to die within the policy, the beneficiary will receive the amount without having to pay tax.

Irrevocable Life Insurance Trust

When the insured dies, the proceeds from any life insurance policies will be included in the estate tax calculations which leaves loved ones with less money than first anticipated. However, this can be avoided with an irrevocable life insurance trust. With this, cash can be withdrawn and the beneficiaries can be changed at any point by the policyholder.

Single Premium Life Insurance

With a single premium whole life insurance policy, a lump sum is paid at the very beginning as opposed to making monthly payments. Once paid, this will remain in place until the death of the insured where the beneficiary receives the death benefit. Since a large amount will be in the policy from the beginning, the investment will build quickly.

Viatical Settlement

When holding a life insurance policy knowing that you only have a short amount of time to live, you might decide to sell your policy for cash. Although you would receive less money than the face value of the policy, it allows you to receive money before death. Then, the buyer of your policy would receive the full amount after the insured dies. For the investor, this is risky because they will obtain less money the longer the insured stays alive which is a fairly morbid thought.

Limited Pay Life Insurance

With a term life insurance policy, you will pay premiums for a certain period of time and then the whole contract ends. Rather than ending, a limited pay life insurance policy would continue to live on even though the premiums have stopped. For example, one might pay twenty years worth of premiums and then stop. However, the beneficiary would still receive the death benefit regardless of how long ago the last payment was made in this instance.

Modified Endowment Contract

In this type of agreement, taxation plays a huge role in the amount of money being held and it is actually very similar to that of an annuity. Where a policy is funded with a higher amount than what is allowed in federal laws, this insurance policy becomes a modified endowment contract (MEC). According to the Internal Revenue Code, an MEC is no longer life insurance.

Juvenile Life Insurance

For those who want to start their children or teenagers on a life insurance policy but don’t want to add them to their own, juvenile life insurance is a good solution. As a permanent type of life insurance, the minor can be insured with a lifetime of benefits. Essentially, this is a savings vehicle that provides a good tax advantage.

Life Insurance Beneficiary

In a life insurance policy, two people have to be named as the recipients of the death benefit after the passing of the insured. Although the primary beneficiary will receive the money, a secondary has to be named just in case the primary dies before the insured. In some cases, tertiary beneficiaries are also named and this is in case both the primary and secondary pass away before the insured.

Participating Life Insurance

With this type of insurance policy, you will only find them available with certain companies because they are very much like an investment. After opening a policy, you will receive dividends each year depending on the company’s profit. Normally, it will only be available on whole life insurance policies but this can be a good way to earn a little extra money.

Life Insurance Surrender Value

Within a life insurance policy, there is always an option to cancel the agreement and this will see the cash value, at that exact moment, paid to the policyholder. Therefore, all policies will have a surrender value and this suggests the amount that would be received if a cancellation were to occur. Of course, initially this won’t be anywhere near the amount that has been paid in but it will recapture a certain percentage. With certain policies designed for maximum cash value accumulation, the life insurance surrender value will often be higher than premiums paid. As a result, a full cash surrender could trigger a taxable event on the money received above the owner’s basis in the policy.

Life insurance cost basis

Your cost basis in your life insurance policy refers to the amount of premiums paid into the policy. Anything above the premiums paid (i.e. your basis) represent potential taxable gains. Potential because the additional gains generally will not be taxed unless your policy lapses, you withdraw above your basis, or you cancel and are taxed on the cash value surrender amount above your basis.

Bank-Owned Life Insurance

Often shortened to just BOLI, this is where banks purchase certain types of life insurance and it becomes a tax shelter for them since they become the owner and/or the beneficiary. As employee benefits continue to increase, BOLI contracts can be used by banks as a funding tool for a cheaper price. Since it is a form of life insurance, the banks do not have to pay tax. Many U.S. banks have increased this asset dramatically since the last financial crisis back in 2008, with some banks owning as much as 20 billion in bank owned life insurance. Mind you, this is only the cash surrender value, with the actual death benefit being 4-5 times this amount.

Contestability Period

Also known as the two year contestability period, as soon as the policy is in force, insurance companies have a short window called a contestability period. During this time, they are allowed to investigate and deny any claims put forward if there is grounds for doing so. On the whole, the length of this period will vary depending on the state jurisdiction with some offering a full two years and others offering only one. For example, policyholders will be in trouble if the insurance company contests and finds that information has been withheld or even entirely fictional.

Suicide Clause

Most insurers will not pay out for suicide if it occurs within two years of having the policy and this is called the suicide clause. Although different insurers vary, two years is normally the time period in place. For the most part, the suicide clause is in place to protect the insurance company. If a policy were to be set up and the policyholder committed suicide within a week, they would have to pay out and losses would be substantial. If suicide occurs after the two year contestability period mentioned directly above the company would be required to pay the death benefit.

Insurable Interest

Whenever loss or damage occurs to something, insurable interest is said to be present when someone would suffer a loss of some kind as a result. With life insurance, we all have an insurable interest in our own lives but also in the lives of dependents, spouses, etc. For the issuance of insurance, insurable interest is required because this will protect the person from intentionally harmful acts.

Life Insurance Declined

Whether it is due to health reasons or whether someone has been declined from another company for life insurance in the past, there is a chance that an application will fail. As well as health issues, this can be because there is a lack of security when it comes to their income or maybe even because of certain habits such as alcoholism. In some cases, insurance companies may even decline an individual for working in a dangerous industry such as roofing, logging, steel, electrical power, and truck driving.

Lapse Rate

If you haven’t yet opened a policy and are shopping around, you will commonly see a lapse rate for each insurer. When a policy is terminated because premiums haven’t been paid, sometimes there hasn’t been enough payments to cover the early expenses of the policy and the company needs to make this up elsewhere. Most commonly, the price of every other customer’s premium will increase so the lapse rate is an important figure to assess.

Misstatement of Age

If an applicant submits the wrong birth date during the application process and the insurer discovers the mistake or intentional error, most of the time this will lead to an adjustment in the premiums. On other occasions, the policy will be completely cancelled – this is especially true if within the contestability period.

Life Insurance Rider

When an insurance company offers packages and different types of product, these are the same for each person. Although the quotes and time frames may be different, the same rules and restrictions will normally apply. However, unique changes can be made to policies with what we call ‘riders’. For a cost that will be either a lump sum or added to the premium, small modifications and caveats can be added to the policy in the form of life insurance riders.Some of the more popular riders are listed below.

Waiver of Premium

With life insurance policies, there will be an opportunity to add riders which make small modifications and certain caveats in different circumstances. With the waiver of premium rider, the premium will not be necessary should the policyholder become disabled or seriously ill. With this in place, the policyholder can remain protected by the insurance even if they are in a position where they simply cannot work.

Return of Premium

Again, this is a rider that can be added to a life insurance policy but it only applies to those who have chosen to go for term life insurance rather than a permanent form. If the time period for which the policy is applicable is outlived, the return of premium rider ensures that 100% of the money paid is returned to the policyholder. As you can imagine, this rider increases the premium somewhat but it does provide security whilst still young and expecting to outlive the policy.

Terminal Illness Rider

Sometimes called ‘Accelerated Death Benefit’, this rider will see a certain percentage of the face value go to the policyholder should they become terminally ill. Regardless of the illness, the money will be paid if the prognoses suggests that the policyholder has less than one year to live. In most cases, a certain percentage will be paid in advance with this rider in place and then the rest will go to the beneficiary upon death.

Paid-Up Additions Rider

Available on whole life insurance, this rider will allow the policyholder to make certain changes despite the policy being ‘active’. By increasing the cash value of the policy, this rider will increase both the living and death benefit as a result. With paid-up additions, they can earn their own dividends which means that the value increases over time.

If you had any issues with life insurance terminology in the past, you should now be good to go ahead and make decisions knowing what is what. If you’re still unsure, contact a finance professional – never enter a contract or policy if you have doubts regarding certain terms or conditions!

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