Life Insurance 101: The Top 15 Terms You Should Understand
Insurance is a complex subject. Anyone who tells you otherwise hasn’t spent much time in the industry. But researching which life insurance policy to buy shouldn’t feel like a maze that ends in you signing paperwork filled with deceptive jargon or topics you haven’t been educated on.
Most insurance companies aren’t trying to trick prospective customers into purchasing a policy that isn’t right for them. But it’s up to you to be an advocate for your needs, so it helps to learn about life insurance and have some “insurance 101” lingo in your back pocket as you shop for a policy.
Below, we’ve created a list of 15 terms to know as you go about learning some insurance basics.
And when in doubt about a policy description or language in your policy documents, ask for clarification. If a prospective provider isn’t giving you straight answers, don’t be afraid to walk away.
Any insurance company worth its policy premiums should have well-informed agents or a strong customer service department with representatives who understand the ins and outs of your policy and the overall life insurance landscape.
Accelerated death benefit
An accelerated death benefit is a rider that allows a policyholder to receive cash advances of their death benefits if they’re diagnosed with a terminal illness. These funds may be used to pay for in-home and hospice care, assisted living facilities, and more.
Your policy’s beneficiaries will still be paid out death benefits after you die, but they will be lower depending on the amount of the death benefit that was paid in advance as an accelerated benefit.
This is a 101-level insurance term for all types of policies. An agent is a policyholder’s link to the insurance company. Agents are licensed by the state where they operate and may work directly with a certain insurer or work with multiple insurance companies to help prospective customers choose the best policy for their needs at the best price.
Agents help prospective policyholders apply for insurance contracts and many provide ongoing service after the policy is purchased.
A life insurance beneficiary is the person who will receive a payout from your policy in the event of your death. The most common life beneficiaries are those you consider family: a spouse, partner, parent, siblings, or children.
You can also name an estate, trust, or even charity or nonprofit organization as a beneficiary on your life insurance policy.
Cash value is typically part of a whole life insurance policy that grows over time. When whole life insurance premiums are paid regularly over the life of the policy, the value accumulates tax free in all but a few limited circumstances. If you terminate your policy before death benefits are paid out, you’re eligible to withdraw the cash value minus a surrender charge and other applicable fees. Some insurers allow you to borrow from your policy’s cash value without terminating the policy altogether.
Conversion, in the insurance sense, is when you can convert an original term life insurance policy to a whole life insurance policy. The right to convert a term policy can make the transition from term to whole financially manageable without sacrificing the primary need to have protection.
A death benefit is the payout beneficiaries receive in the event of the death of the policyholder.
Disability or Premium waiver
A disability waiver of premium is a rider purchased with your policy to ensure it remains in effect even if you encounter a specified hardship (such as serious illness, disability, or major layoff) that prevents you from making premium payments.
The face value, or face amount, of a life insurance policy is equal to the death benefit it pays out. (If you purchase a $300,000 life insurance policy, $300,000 is the face value.)
If you miss a life insurance premium payment, the grace period is the amount of time specified in your insurance contract (usually 30 days) you need to make the payment before your policy lapses.
Permanent life insurance
Permanent life insurance is a blanket term for a life insurance policy that expires well after the natural life expectancy of humans (usually age 121 or beyond). There are several types of permanent life insurance, including whole life insurance and universal life insurance.
Your premium is the amount you pay to keep your life insurance policy in good standing. Depending on your insurance company, premium payments may be made on a monthly, quarterly, semi-annual, or annual basis.
A rider is an additional benefit to an insurance policy that modifies its contents, particularly to add or subtract coverage in special situations (for example, a disability waiver of premium)
Term life insurance
Term life insurance provides protection for a specific time period (most commonly 5, 10, 20, or 30 years). The policy pays death benefits to your beneficiaries if you pass away during the term.
There are two types of term life insurance, level-term and decreasing-term. A level-term life insurance policy pays the same death benefit throughout the term, while the benefits from a decreasing-term policy diminish over the policy’s span.
After you apply for an insurance policy, the insurance company begins the underwriting process to determine whether it will approve your application. This review may range from an automated evaluation of answers to questions on the applications alone, documentation of your health and medical history, or lab and physical examination results. Your premium is also determined during the underwriting phase.
Whole life insurance
Whole life insurance is a policy that provides coverage for your entire life. Whole life insurance premiums are higher than term life premiums, but rates are typically locked in for life. Many whole life insurance policies also have a cash value component.