At first glance, life insurance is pretty simple. You pay an insurance company regularly, and if you pass away, the insurance company pays your family a sum of money that can help them cover expenses and live comfortably.
But once you take a deeper dive into life insurance, you may quickly realize that it often isn’t so easy to understand. As you shop around for life insurance, you may notice many words and phrases that are unfamiliar to you, and that can make it hard for you to select the best coverage for your needs.
In celebration of Life Insurance Awareness Month, we’re excited to share a glossary of 28 essential life insurance terms you should know so you can choose a policy with confidence. We’ve bucketed the definitions into categories to better help you navigate the information.
Basic Life Insurance Definitions
Beneficiary: This is the person or people named to receive the death benefits of a life insurance policy. A contingent beneficiary is a backup in case the primary beneficiary isn’t available.
Related: What to Know About Life Insurance Beneficiaries
Claim: A life insurance claim happens when the insured dies and the beneficiary notifies the life insurance company that it needs to pay death benefits.
Death benefit: When a policyholder dies, their beneficiary receives a sum of money called the death benefit, also known as face value, face amount or payout. Policies must be in effect and up to date on payment for death benefits to be paid.
Final expenses: These are items and services related to death, such as medical bills, funeral arrangements and legal fees.
Insured: The person whose life is being covered under the life insurance policy, also known as policyholder or policyowner.
Types of Life Insurance Definitions
Burial insurance: This coverage is typically for adults ages 50 to 85, and it provides proceeds that can be used to help cover the costs of a funeral.
Guaranteed acceptance life insurance: This coverage is typically geared toward people ages 50 to 85. Acceptance is guaranteed regardless of health or pre-existing conditions.
Juvenile whole life insurance: Juvenile whole life insurance insures the life of a minor with coverage that can be kept for their lifetime.
Term life insurance: Term life insurance offers temporary coverage for a set number of years and level premium payments.
Learn more about term life insurance here.
Universal life insurance: Universal life insurance offers lifelong protection with the unique flexibility to adjust coverage and premium amounts. The policy’s cash value accumulates tax-deferred and can be used for any purpose to meet financial goals.
Related: What is Indexed Universal Life Insurance?
Variable life insurance: This is a form of permanent coverage that provides the opportunity to build cash value with returns based on the performance of selected investments.
Whole life insurance: This coverage offers lifetime protection that builds cash value at a guaranteed interest rate. Permanent life insurance can help cover long-term needs, such as paying for final expenses, supplementing income, or paying off debts.
Life Insurance Processes, Payment & Insurer Definitions
Evidence of insurability: Whether it’s proof of someone’s health, finances or job, evidence of insurability helps insurers decide if someone is eligible for a life insurance policy.
Exclusions: This is a situation or circumstance that prevents death benefits from being paid. For example, certain causes of death may not be covered by some policies.
Grace period: When someone doesn’t pay their life insurance premium on time, their policy may enter a grace period, which gives them extra time to pay before the policy is canceled. Grace periods are often 30 days.
Life expectancy: For life insurance, this is the statistical age that a person is expected to live based on data.
Limited benefit period: This is a waiting period at the beginning of some life insurance policies when they won’t pay benefits if the insured dies. After the period, the policy can pay. For example, a two-year limited benefit period means a life insurance policy can pay death benefits after a two-year waiting period.
Lump sum: Life insurance death benefits are often paid all at once in a lump-sum payment.
Nonforfeiture: A life insurance nonforfeiture clause may allow the insured to receive full or partial benefits or a partial refund of their premiums after a lapse in payment.
Premium payments: This is the amount a policyholder pays to the insurance company for their coverage. Premiums are often paid monthly or quarterly.
Standard risk: This is the risk that an insurance company considers common or normal. Standard risk typically qualifies for standard premiums without special restrictions.
Underwriting: Underwriting is the complex process that happens after someone applies for life insurance. The insurance company considers their age, health and other factors to determine the terms of their coverage, including death benefit and premiums.
Unit of coverage: Some policies are sold in units of coverage. A unit could be a fixed death benefit amount, or it could be a fixed premium amount.
Benefits and Rider-Related Definitions
Accelerated death benefit (ADB): This allows a life insurance policyholder to receive a portion of their death benefit while they’re still living if they’re certified by a doctor as terminally ill. Any ADB paid is usually deducted from the value of the death benefit.
Learn more: Understanding the Accelerated Death Benefit
Benefit rider: These are extra benefits a policyholder may add to a life insurance policy at extra cost. For example, a waiver of premium rider could suspend premium payments if the policyholder becomes critically ill, seriously injured, or physically impaired.
Life Insurance Cash Value Definitions
Cash value: Some types of life insurance have a savings component that earns interest and can help people achieve financial goals. Cash value may be available to withdraw or borrow against.
Cash surrender value: On policies that earn cash value, this is the amount a person receives if they voluntarily terminate their policy before death or before the policy matures.
Collateral assignment of life insurance: Collateral assignment of life insurance occurs when someone uses their life insurance policy’s value as collateral to secure a loan. If they default on the loan or pass away before repaying the entire balance, the lender receives a payout from the policy.
We hope this glossary gives you more confidence when it comes to making important life insurance decisions. Life Insurance Awareness Month is a great time to give your life insurance coverage a check-up. Do you have enough coverage to meet your family’s needs, or is it time to consider coverage for the first time?
Want more? Check out our blogs:
4 Life Insurance Considerations for Parents of Children With Disabilities
4 Things Single Moms Should Know About Life Insurance
Life Insurance at Every Stage of Life
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Bankers Life is here to help customers with their financial and insurance needs so please visit us at BankersLife.com to learn more.
