Life insurance definitions letter A
Accelerated death benefits rider
A life insurance add-on that pays a portion of the death benefit while the insured is still alive if diagnosed with a terminal illness, usually in 12 months or less.
Accidental death and dismemberment of rider
An addition to a policy that will pay extra compensation, up to the total death benefit. If the insured dies of an accident, complications from one, or loss of limb.
Accrued interest
This is the total interest that has accrued on your cash value over the life of the policy at the initial interest rate.
Actual age
The age you are today is based on your last birthday. It’s different from physical age which refers to the age you are closest to physically.
Actuarial table
This is the table used to determine the probability of death at each age. It’s used by underwriters to determine the risk of an individual for policy consideration. Also referred to as a mortality table.
Administrative expense
Operating expenses necessary to run a business are referred to as administrative expenses. These are usually fixed expenses such as the cost of administering a medical exam for a life insurance company.
Adverse selection
Individuals with high-risk lifestyles are more likely to purchase life insurance than those with lower risk. Adverse selection refers to giving policies to such individuals which is why insurers have strict underwriting procedures to help reduce risk.
Agent
An individual has gone through licensing to help consumers obtain insurance. Agents can be licensed for life, health, auto, or commercial. Agents can be captive or independent, selling insurance only for one company or offering many companies’ products.
Annual renewable term life insurance
Term life insurance policy that lasts only one year. It has a level premium and is renewable each year at a higher premium, or converted to permanent life insurance. Typically a supplement for temporary needs.
Annuitant
The person to whom payments are due for an annuity, be it purchased directly or from death benefits, retirement, or other.
Annuity
An annuity is a disbursement of money in installments, most commonly in monthly or annual payments. Death benefits are often paid out in the form of an annuity.
Annuity certain
An annuity that provides income for a specific number of years even if the annuitant dies.
Application
A request from an individual or entity through a statement of information. Statements made on the application are considered accurate to the best of one’s knowledge, if untrue it can be a reason for cancellation by the insurance company.
Attending physician statement
During the underwriting process, it may be decided a closer look at your health is needed in which case a document called an APS will be required from your doctor or hospital which is a written summary of your medical history.
Avocation
A term used to describe a hobby or minor occupation. Some are considered higher risk and can increase premium rates.
Life insurance definitions letter B
Backdating
You can backdate a life insurance policy as much as 6 months in order to keep a lower age category for premium sake. You then must pay up to 6 months of premiums to get it issued.
Beneficiary
The beneficiary is the person, organization, or persons you choose as a recipient of your death benefits for a life insurance policy.
Billing date
The due date that ones premium payment is chosen or set to be paid on.
Bonus rate annuity
Interest is credited to an annuity during its first year in force. This interest rate is intended to attract additional policyholders.
Burial insurance
Used to cover burial and funeral costs, also called final expense insurance.
Life insurance definitions letter C
Cash surrender value
Cash surrender value refers to the amount of money you can receive if you cash out your permanent life insurance policy. Generally, it is the current cash value minus any fees or outstanding loans. Roughly speaking it ends up being something like 50%-80% of the cash value.
Cash-value life insurance
Permanent life insurance policies have a component called cash value which is put aside by the insurance company to help pay the death benefits. Cash value accumulates over the policyholder’s life and can be loaned or withdrawn prior to death.
Child protection rider
A policy addition that gives death benefits to children of the policyholder should they die.
Claim
A claim is when someone has filled out paperwork and submitted it after a death to “claim” the death benefits of their life insurance policy. Two essential pieces needed with the paperwork are proof of death(death certificate usually) and proof of identity for the beneficiary.
Collateral assignment
In some instances, you can use your life insurance policy as collateral(usually only with permanent life insurance policies) to obtain a loan. This is usually done with only a few years left to live and when you die your policy pays the loan off instead of going to a beneficiary.
Company ratings
Sometime ago companies were required to adhere to certain regulations which included checking financials and customer satisfaction. The result of this is a rating system that easily shows consumers where they stand financially and how they are from a customer service standpoint.
Concealment
Deliberately hiding or failing to disclose relevant information to the underwriting of an insurance policy.
Contestability period
The first one or two years of a life insurance policy can be reviewed if a death occurs and deny claims for fraud.
Contingent beneficiary
If the primary beneficiary is not alive then the death benefit proceeds go to the contingent beneficiary or beneficiaries. If no contingent beneficiary is in place then a court decides what happens to the proceeds.
Contingent owner
If the original owner dies this is the next person that will become the new owner.
Critical illness rider
Pays a lump sum to an insured is diagnosed with a critical illness, such as cancer, coma, heart attack, or stroke.
Life insurance definitions letter D
Death benefit
A sum of money paid by an insurer to a beneficiary after the death of a policyholder. The death benefit is also referred to as the face value, of a policy.
Decreasing term life insurance
This is a term policy that has a death benefit that decreases over time as premiums are paid. Usually used as mortgage protection with level premiums.
Direct response
Insurance is sold by employees of an insurance company to an insured over the counter or by mail.
Disability income rider
Policy rider that offers a policyholder a monthly income in the event of disability or inability to work. Doesn’t pay out as much as full disability insurance but may be more affordable and still pays at least a portion of lost income.
Disclosure statement
A form is required to be given to a consumer considering replacing one life insurance policy for another.
Life insurance definitions letter E
Effective date
The date on which a policy goes in force. If the effective date is January 1st but was purchased on November 30th the previous year the policyholder must wait for a little over a month for the insurance to cover anything. This is more common for health insurance but can occur with others as well under odd circumstances.
Exclusions
Insurance policy provisions that clarify coverage explain what circumstances won’t pay benefits to beneficiaries. This can include things such as withholding information (called omitting), lying about personal information on the application, suicide death, or illegal activity that leads to death.
Evidence of insurability
Financial justification for obtaining life insurance is referred to as evidence of insurability. An insurance company evaluates your age, health, and income to check if the insurance you are applying for is within reason.
Life insurance definitions letter F
Face value
The face value is the death benefit amount of insurance that you apply for. The term is interchangeable with a death benefit.
Final expense life insurance
A life insurance policy that is taken out to cover one’s funeral and burial costs. Other immediate expenses that it may cover are medical costs, though depending on circumstances may not be enough to do so. Final expense policies are usually smaller whole-life policies that have level premiums and death benefits, many are guaranteed issues and never expire as long as premiums are paid.
Financial needs analysis
An analysis method to determine a death benefit that makes sense based on their financial goals.
Fixed amount option
A death benefits option is to be paid in specific fixed payment amounts until the proceeds and interest have run out.
Fixed period option
This payment option pays for a certain period of time. The death benefit is left with the insurance company on deposit accruing interest. Specified payment amounts are paid until the benefit and interest have run out.
Free look provision
A period of time, typically 10-30 days, is provided by an insurance company to return it for a refund.
Life insurance definitions letter G
Grace period
Mandatory provision on all policies that gives a policyholder a specific period of time in which to pay the premium after the due date has passed. During this period the policy is still in force.
Group coverage
Insurance coverage is offered by an organization, employer, union, or another group. Much easier to qualify for than individual insurance however coverage is usually less for most people. Group insurance is usually best as supplemental insurance.
Guaranteed issue
Policy type that must be issued if you can pay the premiums. The guaranteed issue cannot be denied based on hobbies or health history.
Guaranteed universal life
A life insurance policy that has a no-lapse guarantee so long as premiums are paid. Offers lower premiums than traditional whole-life policies and also covers the policyholder for their entire life.
Life insurance definitions letter H
Hazard
A condition that increases the chance of loss.
Insurable interest
Proof that someone would suffer financially if you were to die. Insurable interest must exist at the time of application only. In order to list someone as a beneficiary, they must have an insurable interest.
Insurance company
Business entities that specialize in one or more lines of insurance for consumer or commercial use.
Insurance policy
A written contract between two parties: the insurance company and the policyholder. The policy details who is covered, what the conditions for payment are if life insurance, or benefits if health insurance, etc.
Life insurance definitions letter i
Insured
Life insurance policy death benefits are based on the insured party to a policy. The policyholder usually is also the insured party but not always. If the insured passes away then the policy ends and a claim is possible.
Insurer
The specific company that is providing coverage for the specific policy you or someone else holds. This is the company premiums are to be paid and claims are submitted.
Intestate
When someone dies without having a will.
Irrevocable
Beneficiaries can be named as either revocable or irrevocable. Irrevocable means that they cannot be changed without their personal written consent.
Life insurance definitions letter J
Joint life insurance
A policy that has two or more policyholders. Most often purchased by a couple.
Life insurance definitions letter L
Lapsed policy
Policies canceled for lack of premium payment after a grace period is called lapsed policy.
Lapse rate
A rate that life insurance policies are terminated for failure to pay premiums. If policy lapses before enough payments are made to pay policy expenses the company makes up for it from other policyholders. The lapse rate affects the cost of a policy.
Last conversion date
Describes what the last day is that a policy can be converted to a whole life policy from a term policy.
Level policy
This refers to a policy that has the same premium and death benefit for the duration of the policy.
Life insurance classification
Risk determination by an insurance company when applying for life insurance based on avocations, health, age, family history, smoker status, etc. The better the classification the lower your premiums are going to be. There are four classifications usually: standard, standard plus, preferred, and preferred plus.
Life expectancy
The probability an individual will live to a specific age. This is used as the starting point for calculating the base premium.
Life income option
A payout option where the beneficiary gets a set payment for the rest of their life even if the principal amount is exhausted.
Life insurance
A protection guarantees payment to a beneficiary at the death of the insured.
Living benefits
A cash payment while someone is still alive. Specific conditions or riders used will vary such as critical illness rider, accelerated death benefits rider, etc.
Long-term care rider
Policy add-on that removes money from death benefit to pay for long-term care in a nursing home, a private nurse, or others depending on the rider. Sometimes usable for chronic illness when unable to take care of oneself.
Life insurance definitions letter M
Material misrepresentation
An intentional lie that was put on your application is also fraud. If discovered, your beneficiary may be denied death benefit or policy canceled prior to death.
Medical information bureau
The MIB is a resource that life insurance companies use to help verify the medical history listed on an application. This helps the insurance company determine the honesty of your statements and get a clear picture of your health for underwriting and risk classification.
Misstatement of age
Falsely stating one’s age either intentionally or unintentionally. Premium will be adjusted when the misstatement is discovered at the correct age.
Mortality
A simple term for the frequency of death at each age.
Mortgage protection insurance
Two types exist, the first is purchased by a lender to protect themselves in the event of your death paying out directly to them. The second is a method of using the term whole life insurance policies by consumers to protect one’s mortgage when they pass away with death benefits going to a beneficiary of their choosing.
Life insurance definitions letter N
Non-participating life insurance company
A life insurance company that does not pay dividends to its policyholders. Term insurance policies have no cash value and are one example, but whole life and other permanent life insurance policies with cash value may also be included if offered by such a company.
Nonforfeiture
Options are available to an individual after discontinuing premium payments on a life insurance policy with cash value. Typical choices are to take cash or purchase extended term insurance or reduced paid-up life insurance.
Nonsmoker rates
A rate classification is given if someone does not smoke because they are expected to live longer than smokers. Classification is given to anyone that hasn’t smoked in at least a year prior to applying for life insurance.
Life insurance definitions letter O
Open enrollment
Each year employees are able to make changes to their insurance and this period is called the open enrollment period. Employees can make changes, enroll, or waive their employer benefits during this time. Open enrollment periods are also part of Medicare and marketplace health insurance options for those eligible.
Life insurance definitions letter P
Paid-up insurance
If you pay all premiums up front then it is referred to as paid-up insurance.
Paramedical exam
An exam is required by an insurance company during the underwriting process to verify the health status of an applicant for life insurance. It is paid for by the company and done at the applicant’s preference.
Participating life insurance company
Throughout the year life insurance companies track profit and a participating life insurance company will pay a dividend to policyholders for the earnings it made that year. This only applies to policies with cash value like whole life.
Permanent life insurance
Life insurance policies are intended to last the entire life of a policyholder. Each type has a cash value component that helps reduce cost and ensure the insurance company has sufficient money to pay the death benefit when due.
Policyholder
A life insurance policy owner. The policyholder is the one able to make changes to it and sometimes is different than the insured to who the death benefits are tied. For example, two patterns in a company may take insurance policies out on each other and be the policyholder while the other person is the insured individual protecting themselves from the financial loss the other person’s death may have to the company.
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Policy loan
A loan from the life insurance company against their cash value balance in a permanent life insurance policy.
Premium
The monthly fee you must pay to the insurance company for the insurance you have.
Primary beneficiary
At death, this is the first person that an insurance company will pay death benefits.
Private mortgage insurance
When a home buyer puts down less than 20% of a home’s value the bank or lender requires PMI or private mortgage insurance to better protect the lender. The cost of this insurance gets added to the mortgage payment and is cancelable once 22% of the value of the home is paid off.
Life insurance definitions letter Q
Quote
An estimated cost for insurance coverage is based on your age and health.
Life insurance definitions letter R
Rating
This is the health classification given by a company to an individual applying for life insurance and determines how much he or she pays for it.
Reduced paid-up insurance
An insurance option available for nonforfeiture allows continuing coverage at a reduced amount without any more premiums.
Reinstatement
Restoring a policy after lapse to premium-paying status requires the owner to pay past premiums due plus interest.
Replacement
When buying a new policy to replace coverage one already has. A life insurance disclosure form needs to be filled out stating you understand the pros and cons of each policy.
Return of premium rider
A possible add-on to a life insurance policy that costs extra and offers the benefit of returning the premiums paid if they outlive the policy.
Riders
Options for life insurance to give them additional coverage or different control of the insurance policy.
Life insurance definitions letter S
Settlement
When an insurance company pays a claim it’s called a settlement and refers to the distribution of death benefits.
Settlement options
Ways that a beneficiary can choose to have death benefits received from a policy.
Standard risk
Someone classified as standard has an average life expectancy.
Substandard risk
An insurable individual with higher risk but below-average life expectancy due to health, habits, or other reasons will be offered higher premiums.
Suicide clause
To avoid adverse selection of individuals considering suicide, life insurance companies add a one or two-year suicide clause that will deny claims if done so during its clause time frame.
Supplementary contract
On occasion, the insurance company will keep a portion of the death benefit and will make payments based on the settlement option chosen. This can be an agreement made between the policy-owner or the beneficiary.
Surrender
This is the act of giving up an insurance policy. If it was a permanent life insurance policy with cash value then the company will pay the policyholder that cash value minus any loans or other fees as noted in the policy.
Surrender charges
A fee is deducted from the cash value when it is canceled for the cash value.
Survivor protection
Having life insurance in place to protect those that live on after one’s death. This is the primary reason that life insurance is purchased by it to protect one’s family member or maybe to protect a business someone created without a family.
Survivorship life insurance
Life insurance is designed to protect a married couple. It pays benefits after both parties have passed away and are often used to pay estate taxes protecting heirs from needing to pay it.
Life insurance definitions letter T
Term
The period of time a policy is designed to be in force.
Term conversion rider
Many permanent life insurance policies include this but it may be an add-on allowing one to convert a term life insurance to a permanent life insurance policy without additional underwriting procedures or evidence of insurability.
Term date
Coverage date a policy is designed to end on.
Term life insurance
Temporary life insurance with a set number of years of protection after which it ends or is renewable at a higher premium. Typical terms go from 5 to 30 years, have no cash value, and are only useful due to lower premiums.
Time payment of claims
A provision that requires ongoing claims to be paid at least once per month.
Trust
An entity where assets are placed for use by beneficiaries. Helps ensure that your death benefits and other assets go to those you desire.
Life insurance definitions letter U
Underwriter
An individual working for a life insurance company evaluates an application and gives a classification to that individual to help determine the premium rate.
Underwriting
This is the process that an underwriter goes through to determine if the applicant falls within the approved risk calculation for the insurance company or not. Many factors are evaluated to determine if an application will be approved or denied.
Universal life insurance
One of several permanent life insurance options. This one specifically offers flexibility in premiums and death benefits at the policyholder’s discretion.
Life insurance definitions letter V
Variable life insurance
Permanent life insurance with cash value that is tied to financial markets.
Variable universal life
A combination of variable and universal life has flexible premiums and death benefits while also having cash value tied to financial markets.
Life insurance definitions letter W
Waiting period
The period between when a claim is filed and when it is paid.
Waiver of premium rider
Additional policy add-on that can help a policyholder with payments in the event they are disabled or unable to work. The parameters are quite specific usually and premiums continue once the disability ends.
Whole life insurance
The most purchased permanent life insurance option. As with other permanent life insurance options, they are tax-advantaged, build cash value, and have many living benefits.
Will
A legal document that details how their assets should be handled after their death. Often combined with trust.