Common Life Insurance Policy Terms, definition and Types

People buying life insurance policies all face a familiar challenge; they must cut through and understand the jargon and technical terms used by the insurance industry. You need to know what you are being offered in the policy before you sign on the dotted line.

Many terms would go over your head, such as an “accelerated death benefit.” It may sound like something you want to have, but you must know exactly what it means before accepting it.

Understanding life insurance terms and definitions allow you to make an informed decision and properly compare different options and coverage’s. If you’re interested in buying a life insurance policy, here are the common life insurance terms that you’ll want to know.

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What is life insurance policy?

A life insurance policy is an agreement between an insurance company and a person (or legal entity). A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured policyholder dies, in exchange for the premiums paid by the policyholder during their lifetime. Each life insurance policy is different, and each state’s laws regulating insurance policies are different

1. Insured Person

The person whose death will be covered by the life insurance policy is known as the insured person. You can also take out a policy for a loved one such as your child, whereby your child will become the insured person, and you will be the policyholder.

2. Insurable Interest

Insurable interest is often related to ownership, relationship by law or blood and possession.It’s the basis of all insurance policies. However, it is not an important element of life insurance contracts under modern law. Insurable interest is an essential requirement for issuing an insurance policy that makes the entity or event legal, valid and protected against intentionally harmful acts.

People not subject to financial loss do not have an insurable interest. Therefore a person or entity cannot purchase an insurance policy to cover themselves if they are not actually subject to the risk of financial loss.

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3. Beneficiary

The person or multiple people who will receive money from the insurance policy upon the insured person’s death is known as the beneficiary. You can name anyone as a beneficiary for your life insurance policy.

4. Death Benefit

The amount of money the beneficiary will be paid upon the insured person’s death is known as the death benefit. The policyholder can structure how the insurer pays the death benefits.For life insurance policies, death benefits are not subject to income tax and named beneficiaries ordinarily receive the death benefit as a lump-sum payment.

5. Policyholder

The person who owns the policy and is responsible for determining the details and making payments for the life insurance policy is known as the policyholder.

6.Premiums

The payments you will make to the insurance company for their life insurance policy are known as premiums

7. Face Value

The total death benefit amount that the life insurance policy will payout is known as the face value. For instance, if you take out an insurance policy worth $100,000, the policy’s face value is $100,000. The face value of an insurance policy can change over time if you increase the coverage amount or borrow from the policy.

8. Cash Value Account

When you purchase a permanent life insurance policy, you will be given a cash value account, which will keep increasing in value over time. In some policies, it acts as a savings account, while in others, it functions as an investment account, as the policyholder can decide how their money is invested

9. Surrender Value

The value your insurance company will pay you at any time for your insurance policy is known as the surrender value. It’s not the same as the death benefit or face value of the policy.

10. Lapse

When you fail to make your payments on time, your insurance policy will lapse. It means the policy will stop covering you and will effectively mean it won’t pay out anything upon your death

11. Life insurance

A contract with an insurance company that, in exchange for premium payments, provides a sum of money, known as a death benefit, to beneficiaries upon the insured’s death

12. Underwriter

The person who evaluates you for potential risks and exposures in order to determine the risk classification and whether or not the company will insure you

13.Whole life insurance

A type of permanent coverage that has fixed premiums, a fixed death benefit, and guaranteed cash value. Policy may receive dividends

14. Term life insurance

Provides coverage for a certain time period — or term — such as 15, 25 or 35 years. The death benefit will be paid to the beneficiary(ies) if you pass during the term

15. Settlement options

How the death benefit is paid to the beneficiaries. Usually a lump sum but can also be paid in installments.

16. Standard risk

Refers to a risk that a life insurance company considers common or normal, which would qualify you for a standard rate.

17. Policy loan

A loan issued by the life insurance company that uses the cash value of your life insurance policy as collateral. Loans are charged an interest rate and outstanding loans or unpaid interest may affect the death benefit. In addition, failure to pay the loan balance could result in policy termination

Read: What is different between Secured loans vs Unsecured loans

18. Life expectancy

The age to which a person is expected to live. Life expectancy is considered when determining your premium.

19.Grace period

The amount of time after the premium due date when a premium payment can be made without your insurance policy lapsing.

20. Dividend

A portion of a company’s profits that may be paid to policyowners in conjunction with a life insurance policy. Typically seen on whole life policies, dividends are a partial
return of premium and are not guaranteed.

Types of life insurance

There are two major types of life insurance—term and whole life: Term Insurance is the simplest form of life insurance. It pays only if death occurs during the term of the policy, which is usually from one to 30 years. Most term policies have no other benefit provisions.

Whole life or permanent insurance pays a death benefit whenever you die—even if you live to 100! There are three major types of whole life or permanent life insurance—traditional whole life, universal life, and variable universal life, and there are variations within each type.

 

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