Essential Life Insurance Terms and Definitions to Know (2024) (2024)

Knowing key terms such as beneficiary, riders, premiums and cash value is essential when making decisions about what kind of policy and the amount of coverage to choose. Below is a list of some key terms that will help you understand what you’re being shown when you buy life insurance.

Life Insurance

Life insurance provides financial protection for individuals and their families in the event of death. This financial protection comes in the form of a death benefit, which generally provides a lump-sum payment to beneficiaries when the insured person passes away.

Premiums

Life insurance premiums are the amount of money that policyholders pay to maintain their life insurance coverage. They are usually paid on a monthly, quarterly or annual basis. The premium amount can vary depending on factors such as gender, age, health history and lifestyle. Your premiums are also influenced by your insurance needs — the more coverage you need, the higher the premiums. Premiums typically remain fixed for the length of the policy; however, some policies allow for flexible payments.

Death Benefit

A life insurance death benefit is a lump-sum payment made to the designated beneficiary of the policy upon the death of the insured person. The amount of this payment is typically determined when purchasing a life insurance policy and can be used to help cover funeral costs, debts or other financial losses resulting from the death of the insured individual.

Policyholder

A life insurance policyholder is the owner of the life insurance policy and has all legal rights to affect the life insurance policy. The owner can transfer ownership, change payment, change the payor and can designate a beneficiary or many beneficiaries.

Insured

The insured in a life insurance policy is the individual whose life is covered by the policy. They are typically required to provide personal information such as age, occupation and medical history in order to be accepted for coverage, and their premiums are based on these factors. The death benefit of the policy will be paid out upon the insured’s passing.

Beneficiary

The beneficiary of a life insurance policy is the individual who or entity that will receive the death benefit upon the death of the insured. Beneficiaries are typically designated during the policy purchase, and they can be changed at any time as long as the policyholder is alive and is legally competent.

Riders

A life insurance rider is an additional coverage option added to a life insurance policy that often provides extra protection at an additional cost. Riders can cover a variety of potential situations, such as waiver of premium due to disability, chronic illness, long-term care, critical illness, accidental death or dismemberment and more.

Underwriting

Life insurance underwriting is the process of assessing risk and determining an individual’s eligibility for life insurance coverage. The process typically involves reviewing an individual’s health through a medical exam and an application that covers a range of information about the applicant including lifestyle, occupation and other relevant factors in order to calculate a premium rate based on the individual’s risk to the insurance company. In cases where there is no medical exam required, underwriting utilizes electronic health data and other data to determine eligibility.

Surrender Value

The surrender value of a permanent life insurance policy is the amount of money that a policyholder may withdraw when canceling the policy before it reaches maturity or is used to fund a death benefit. Generally, the surrender value of a policy is the amount of premiums paid, plus interest accrued, minus any surrender charges. If the policyholder cancels the policy before its surrender period —which is usually 10 or 15 years — the policyholder will pay a hefty surrender charge.

Mutual Life Insurance

A mutual life insurance company is a type of insurer owned by its policyholders, who are also the beneficiaries and have a say in how the company is managed.

Dividends

Dividends from a whole life policy refer to the portion of a life insurance company’s profits that are paid back to policyholders. Profits come from the life insurance company’s excess sales, savings on expenses, lower-than-expected death benefit claims and excess investment returns.

Face Value

A life insurance policy’s face value is its death benefit: a lump-sum payment made to the designated beneficiary of the policy upon the death of the insured person.

Cash Value Account

The accumulated cash value of a life insurance policy represents a portion of your premium payments that you can borrow against, make a withdrawal from, or use to pay premiums. Be aware that withdrawing from your cash value account generally affects the amount of future death benefits.

Knowing the different types of life insurance can help individuals make an informed decision that best meets their needs. This article will provide an overview of the types of life insurance available.

Individual Life Insurance

Individual life insurance is a type of policy that is owned by and paid for by an individual, unlike group life insurance. Individual life insurance policies are controlled entirely by the individual owner of the policy. It provides protection to an individual in the event of death.

Group Life Insurance

Group life insurance provides coverage to a group of people, such as employees of a company. Access to this coverage is provided by the employer and it is often not portable if you change employment.

Term Life Insurance

Term life insurance provides financial protection for a fixed period of time, has no cash value growth and has fixed premium payments. It is common to see policy term lengths shown as 10-year term, 15-year term, 20-year term, 25-year term and 30-year term.

Whole Life Insurance

Whole life insurance is a type of permanent life insurance policy that provides a guaranteed death benefit, guaranteed cash value growth and non-guaranteed dividend growth. Participating whole life insurance pays non-guaranteed dividends, and non-participating whole life insurance does not pay dividends.

Universal Life Insurance

Universal life insurance is a type of permanent life insurance policy that offers flexible premiums and the ability to adjust the death benefit. It also combines a savings element that can accumulate over time through a fixed interest rate declared each year.

Variable Universal Life Insurance

Variable universal life insurance is a type of permanent life insurance policy that provides the policyholder with the flexibility to adjust the death benefit, premiums and savings element through subaccounts. These subaccounts are designed to be managed similarly to mutual funds and often carry the name, and are separately managed by a mutual fund company. These funds are subject to market risk and require an insurance agent with a securities license to sell them.

Indexed Universal Life Insurance

Indexed universal life insurance is a type of permanent life insurance policy where a portion of the policy’s cash value goes into an account whose interest rate is linked to an index, such as the Standard & Poor’s 500. Generally, the principal amount of the policy is protected from market losses, but there may also be a cap on annual growth. For example, if your policy’s cap is 10%, and the index grew by 15% during the year, your index-linked cash value account will only earn 10% for the year.

Permanent Life Insurance

Permanent life insurance is a generic term used to describe multiple types of life insurance products designed to last your entire life — unlike term life insurance, which lasts some fixed period of time, such as 10 or 15 years. Types of permanent life insurance include whole life insurance, universal life insurance, indexed universal life insurance and variable life insurance.

Variable Life Insurance

Variable life insurance is a generic term most often used when talking about variable universal life insurance. These policies’ payouts hinge on market returns, and you may lose some or all of your principal inside the policy.

Guaranteed-Issue Life Insurance

Guaranteed-issue life insurance does not require medical examinations or health questions in the application process. It provides coverage regardless of pre-existing conditions, offers limited death benefits and often requires a two-year waiting period before receiving full benefits.

Simplified-Issue Life Insurance

Simplified-issue life insurance requires minimal health information from the applicant and does not require a medical exam in order to be approved. It is an alternative to guaranteed-issue life insurance and offers immediate coverage with higher death benefits than guaranteed-issue policies.

Survivorship Life Insurance

Survivorship life insurance provides coverage for two or more individuals, usually spouses, with the death benefit being paid out upon the passing of the last insured individual.

Funeral Insurance

Funeral insurance, sometimes called final expense insurance, provides coverage to individuals to cover the cost of funeral expenses upon their death. It typically pays out a lump-sum cash benefit directly to a pre-arranged funeral home with the remaining benefit, if any, to the beneficiaries.

Burial Insurance

Burial insurance, much like funeral insurance, provides financial coverage to individuals for the costs associated with their burial expenses upon their death. This type of policy usually pays out a lump-sum cash benefit directly to a pre-arranged funeral home or cemetery.

Riders are additional coverage options that can be added to a life insurance policy to customize it and provide more protection for the policyholder. Riders have become increasingly popular in recent years, as they enable individuals to tailor their life insurance policies according to their specific needs and budget. This section provides an overview of the different types of riders available for life insurance policies, helping you have a basic understanding how these riders work.

Accelerated Death Benefit Rider

An accelerated death benefit rider allows the policyholder to access a portion of the death benefit during their lifetime. This feature can be triggered for individuals who are diagnosed with a terminal illness but may also trigger from a chronic or critical illness.

Accidental Death Benefit Rider

An accidental death benefit rider provides an additional death benefit if the insured passes away due to an accident. This type of coverage pays out regardless of any existing health conditions and is triggered by an unexpected incident, such as a car crash.

Children’s Rider

A children’s rider on life insurance provides coverage for minor dependents of the policyholder and can be added to an existing policy, typically with benefit amounts ranging from $1,000 to $25,000. Companies typically charge just one insurance rate to add this rider for any number of natural or adopted children through the age of majority. Your children will also have the opportunity to convert this coverage into their own policy just before they reach the age of majority.

Long-Term Care Rider

A long-term care rider on life insurance provides coverage for the cost of long-term care services. This rider pays out a specified amount each month to cover the expenses related to custodial or assisted living care, home health aides or adult daycare programs.

Here are a few more terms that are important to be aware of when shopping for life insurance.

Exclusions

Exclusions are provisions in life insurance policies that deny coverage for certain illnesses, events or circ*mstances. Common exclusions may include suicide, war-related deaths, pre-existing medical conditions and hazardous activities such as skydiving or mountaineering.

Incontestability Clause

The incontestability clause in a life insurance policy states that once the policy is in effect for some time —usually two years — the insurer cannot contest or deny claims on the basis of any misstatement made by the policyholder during the application process. This clause protects policyholders from having their claims denied due to unintentional or incorrect statements made when applying for a life insurance policy.

Contestability Period

The contestability period in a life insurance policy is a window of time — usually two years— after the policy has been issued. During this time, the insurer can investigate any misstatement made by the policyholder and deny or reduce the amount of benefits in accordance with their findings. The contestability period begins on the date of issue.

Grace Period

The grace period in a life insurance policy is an additional window of time — often 30 days —after the premium payment due date has passed, during which the policyholder can pay premiums without penalty or risk of cancellation of coverage. A grace period ensures that policyholders have adequate time to make their payments and allows them to maintain uninterrupted coverage.

Lapse

A lapse in a life insurance policy happens when the policyholder fails to make timely premium payments, which terminates the policy. Once a policy has lapsed, any unpaid premiums need to be paid in order for the policyholder before coverage is reinstated.

Convertible Term

A convertible term insurance policy allows policyholders to convert their existing coverage from a term life plan to a permanent life plan without any additional evidence of insurability.

Guaranteed Insurability Option

A guaranteed insurability option allows policyholders to increase their coverage at specified times without having to provide any evidence of insurability, such as a medical exam.

Living Benefits

Living benefits provide policyholders the opportunity to access a portion of their death benefit while they are still alive. Triggering events for use of these benefits include chronic and critical illnesses. A chronic illness is generally when someone is unable to perform two of six activities of daily living (ADLs) without substantial assistance or has a severe cognitive impairment requiring substantial assistance. ADLs include bathing, toileting, transferring, dressing, eating and continence. Examples of critical illness include a heart attack, cancer diagnosis, stroke and severe burns.

Having an understanding of the various policy features, exclusions, riders and benefits can help individuals get the right coverage for their needs and avoid costly mistakes. Knowing these important terms can also help individuals compare different policies and insurers, ultimately getting the best life insurance for their money.

Without proper knowledge of these key terms, policyholders may inadvertently miss out on certain riders that could be beneficial in times of need, such as long-term care riders or children’s riders. This could leave the insured person’s loved ones without enough funds to cover expenses in case of an untimely death or prolonged illness. Failure to understand key terms may lead to policyholders buying inappropriate coverage or expensive policies not suitable for their financial situation.

Methodology: Our System for Ranking the Best Life Insurance Companies

Our team researches and ranks life insurance companies using an in-depth scoring system that considers the factors most important to consumers like you. Our analysis includes a comprehensive review of each provider we feature based on available coverage, customizability, availability, customer service and company reputation. Here are the factors we take into consideration when rating life insurance providers:

• Brand trust (40%): Life insurance payouts can exceed $100,000 or more, which makes choosing a reputable and trustworthy installer important. To assess brand trust, we use J.D. Power and Associates customer satisfaction surveys, AM Best credit rating scores and the National Association of Insurance Commissioners (NAIC) complaint index. The higher a company scores in each area, the more points it receives.
• Coverage (33%): The more policy options a life insurance company offers, the more opportunities you have to obtain the right coverage for your specific needs. For this reason, we give companies the most points for offering multiple types of life insurance, including various term, permanent and no-exam options.
• Availability and ease of use (19%): Since life insurance coverage options can be complex, we consider the ways a customer can reach a company — and how easy communication is. For this category, we research how many communication channels a company offers for general customer support, claims processing and the application process. Companies earn the most points for offering various ways to interact with an agent, both in-person and online.
• Riders (8%): Companies offering various life insurance riders or endorsem*nts allow policyholders to better customize their coverage. In this category, we determine how many riders a company offers and award the most points to providers with more than 10 options.

We use our rating system to compare and contrast each company against key factors to help us determine the best life insurance companies in the industry. To learn more, read ourfull life insurance methodologyfor reviewing and scoring providers.AM Best Disclaimer

Scott Karstens is an accomplished insurance and financial services veteran, having worked inthe industry since 2001. He is currently the President of NFG Brokerage, but he is becoming best known as the Founder and CEO of both Broker Backoffice and his new direct-to-consumer insurance platform called Quote Bot, which offers user-friendly solutions for life insurance planning.

Ryan Lasker is a financial writer and editor with bylines in Morning Brew, The Motley Fool, and several more. As a certified public accountant, he leverages his technical expertise in personal finance and tax to fuel his passion for teaching financial literacy. When he’s not writing, editing or working in a spreadsheet, he’s biking the D.C. trails or reading.