Life Insurance Terms

Thinking about buying a life insurance policy? Right on. Before you sign your name and make your first payment, though, you want to be sure you understand what you’re getting. If you’re feeling baffled by all the new terminology, read through our glossary of life insurance terms and get some clarity.

Administrative Expense

The life insurance company's operating costs. It covers salaries, medical examinations, building rent, underwriting, advertising, printing costs, agency expenses and premium taxes. These expenses get lumped into what you pay, and are used to calculate dividends and premium rates.

Accelerated Death Benefits

The death benefits that are available prior to the death of the insured. Sometimes called Living Benefits, they are usually accessible in cases of chronic or terminal illness.

Accidental Death Insurance

Generally an add-on to a regular life insurance policy, Accidental Death Insurance is a pretty accurate name. It is only paid if the death of the insured occurs as the result of an accident.

Accidental Death and Dismemberment Insurance

An insurance policy that pays out only if the insured dies, becomes blind or is dismembered in an accident.

Accrued Interest

Interest that has been earned and recognized but not yet paid out (or the borrower has not received the payment).

Agent

A person licensed by the state to negotiate insurance contracts. An agent can be independent and represent multiple companies, or a direct writer who sells policies for only one company.

Amount of Insurance

The coverage that is issued by a life insurance company. Also called the Coverage Amount, Face Amount or Sum Insured.

Annuity

A contract that pays a fixed sum of money at regular intervals, usually for life.

Annuity Certain

A contract that pays an income for a set number of years, and will pay the annuitant’s beneficiary or estate if the annuitant dies before the end of the payment term.

Application

A statement of information made by a person applying for life insurance. Life insurance companies use the information from applications to determine the risk of each would-be policy-owner. Companies then determine an applicant's underwriting classification and premium rates.

Assignment

The legal transfer—to another person or to an entity like a financial institution—of the claim rights an individual has on an insurance policy. This is done to qualify for a loan.

Beneficiary

The individual who receives proceeds from a life insurance policy at the death of the insured. A beneficiary who is less than 18 years old must be represented by a legal guardian or a public official. Anyone can be named as a beneficiary.

Billing Date

The day of the month that the life insurance premium bill is due. (You’ll want to keep track of this to make sure your policy doesn’t lapse!)

Bonus Rate Annuity

An annuity carrying an extra-high interest rate offered for only the first year, to attract new policyholders.

Cash Surrender Value

The cash amount you would get if you voluntarily terminate coverage before a policy becomes payable by death or maturity. The amount is the cash value stated in the policy, minus a surrender charge, any outstanding loans and interest on those loans. The cash value represents the savings component of a life insurance policy, since you can access the money relatively quickly if you need to.

Collateral Assignment of Life Insurance

A contract that gives a lender claim to a life insurance policy death benefit as collateral for a loan.

Contingent Owner

The person who will become the owner of a life plan if the original owner dies before the policy ends.

Conversion Right

The right – granted by some term life insurance policies – to change the current policy of an individual to a permanent insurance policy within a certain timeframe, without giving proof of insurability.

Cost of Insurance

The amount an individual must pay for his or her life insurance policy, also known as a premium. The monthly charge for a life insurance policy fluctuates depending on the insured person’s health, age, sex and other considerations such as lifestyle and the nature of the person’s profession. Poor health and extreme hobbies are likely to increase the cost of insurance—or may even lead to denial of coverage altogether.

Coverage Period

The period of time the life insurance covers the policy-holder.

Coverage End Date

The day the insurance coverage ends.

Coverage Start Date

The day the insurance coverage becomes effective.

Death Benefit

The amount of money paid to the beneficiary when the policyholder dies. If loans are taken on these benefits, the payable amount will decrease. The amount of the benefit might also increase if there are more benefits payable when certain conditions are met.

Disability Waiver of Premium

A condition that states that the life insurance company will not require the insured to pay the usual recurring fee to maintain the life insurance policy if the insured person becomes disabled. The definition of a disability can vary from one life insurance company to another, and policies can vary based on when and for how long they will waive a premium in the event of a disability. Adding a disability waiver usually leads to a higher premium.

Direct Response

The direct sale of a policy by an insurance company to the insured, through the company’s own employees, by mail or over the counter.

Disclosure Statement

A document explaining the details of the policy for the benefit of the consumer.

Dividend

The return that some policyholders will receive as part of the distribution of a portion of an insurance company’s profits, as decided by the Board of Directors of the company.

Evidence of Insurability

A statement of the prospective policyholder’s physical health and other information, such as assets and income, which helps the insurance company decide whether the applicant is eligible for insurance, the amount of risk they pose to the company and what premium the company will charge.

Face Amount

The amount of insurance that an individual buys. The Face Amount will be paid in the event of the policyholder’s death or when the policy reaches maturity. It does not include any extra benefits that might be payable under accidental death or other special provisions. Face Amount can also be called Amount of Insurance, Coverage Amount or Sum Insured.

Financial Needs Analysis

The analysis that reviews the policyholder’s current financial goals, with the objective of helping to determine how much insurance he or she might require.

Fixed Amount Option

An option for death benefits to be paid in a series of fixed-amount payments until the proceeds and interest earned run out.

Fixed Period Option

The option in a life insurance policy that makes death benefit payments for a set length of time. The death benefit is left on deposit with the insurance company and accrues interest. The life insurance company makes payments of the specified amount until the benefit and interest run out.

Free Look Provision

The amount of time a life insurance policyholder has to look over the insurance policy and, if not

Grace Period

The period of time a policy remains valid even after a premium payment is due and goes unpaid. It’s usually a month so don’t wait too long to make things right.

Group Life Insurance

The life insurance that is often offered by an employer (or a large organization) to its employees. Employers usually offer group life insurance as part of a larger employer benefit package.

Incontestable Clause

The clause in a life insurance policy that enables an insurance company to cancel the contract for up to two calendar years from the original policy issuing date if the policy-holder did not disclose critical information that would have made him or her ineligible for coverage.

Insurance Policy

The legal document that the life insurance company issues to the policy holder and that outlines the terms of the insurance.

Insurable Interest

Proof that a person who takes out a life insurance policy on someone else has a substantial and lawful emotional or financial interest in that person’s continued wellbeing. An insurable interest is mandatory when applying to purchase life insurance on another person.

Insured

The person who is insured by a life insurance policy. When his or her death occurs, a payment will be made to the insured person's named beneficiary.

Insurer

The life insurance company.

Interest Option

The primary beneficiary of a life insurance policy chooses to receive only interest payments, allowing the original death benefit principal to pass to a secondary beneficiary when the primary beneficiary dies.

Intestate

Describes the situation in which someone dies without having a written will.

Joint First-To-Die

A life insurance policy that provides coverage for two people and makes payment to the survivor as soon as the first person dies. This policy is often used to cover estate tax expenses.

Joint Last-To-Die

A life insurance policy that provides coverage for two people and makes payment only after both people have passed away. This type of policy is mostly used to cover estate tax expenses in order to protect value for children in a situation in which there might be significant taxes due at the time of the last parent’s demise.

Lapse

The closure of an insurance policy because of failure to pay the premiums within the defined grace period. The option to reinstate the coverage with similar premiums and benefits exists, but the policy holder will have to re-qualify for the coverage, as well as pay the unpaid premiums. Sometimes premiums go up after a lapse.

Last Conversion Date

The last day a policy can be converted from term life insurance to whole life insurance to avoid losing money paid on premiums.

Life Expectancy

The age to which a person is likely to live, according to actuarial life tables.

Life Income Option

An arrangement in which the payout from a life insurance policy will go to the beneficiary as equal payments paid for the duration of the beneficiary’s life (payments will continue even if the principal is exhausted).

Life Insurance

A form of protection from risk that guarantees payment upon the death of the policyholder.

Lifetime Coverage

An insurance policy that has a coverage term equal to the lifetime of the insured person.

Living Benefits

An advance cash payment of a portion of the insurance before the insured person dies. It allows for financial assistance to the insured individual while he or she is still alive.

Living Will

A will that details the author’s desires regarding their medical treatment in case they are no longer able to express informed consent.

Medical Report

A report on the health of the life insurance applicant that is filled out by a physician and based on a physical examination of the prospective policyholder.

Medical Information Bureau (MIB)

A non-profit group of life insurance companies that deters fraud by alerting membecompanies of potential problems.

Misstatement of Age

When an applicant for life insurance lies about his or her birth date.

Mortality

The rate of death at a given age. This is used to calculate life insurance risk.

Mortgage Life Insurance

A form of life insurance that makes remaining mortgage payments directly to the lender when the homeowner dies.

Non-Forfeiture Clause

A clause in an insurance policy with cash value that entitles the insured to all or a portion of the benefits, or a partial refund on premiums paid, if the insured person misses premium payments and the policy lapses as a result. This clause is usually only in effect for a limited period of time.

Non-Participating Life Insurance Policy

An insurance policy that stipulates that the insurance company will not distribute any parts of its profits to the policy owner. You pay your premiums, and your beneficiary receives a lump sum when you die. This sum will not grow or shrink based on the insurance company’s investment portfolio returns.

Non-Smoker Rates

A lower rate acknowledging that non-smokers are expected to live longer than smokers. Anyone who has not been a smoker for at least a year before applying for a life insurance policy can benefit from this discount.

Owner

The individual who purchased the life insurance policy. He or she is usually the same person as the insured but in certain cases, the owner could be a different individual who has been authorized to be the owner, such as a spouse, a child, a parent, a business partner with an insurable interest or a corporation.

Paid-Up Insurance

A life insurance policy for which all premiums have been paid and the coverage is still effective.

Participating Insurance

A life insurance policy where the entities or individuals who own the policy receive a portion of surplus earnings from the life insurance company’s investments and business (subject to approval from the company’s Board of Directors). A "policy dividend" gets distributed to all policy owners who have participating policies.

Permanent Life Insurance or “Perm”

A life insurance policy that provides coverage until the death of the insured person.

Policy

The legal document, issued by the life insurance company to the policyholder, stating the terms of the life insurance contract.

Policy Loan

A loan a life insurance company makes to a policy owner. The security for the loan is the cash value of the owner’s policy.

Policy Proceeds

The amount of money that is actually paid out on a life insurance policy at death, or when the policy owner receives payment at surrender or maturity of the policy.

Preferred Rates

Cheaper insurance for people who can prove they are a lower risk to the insurance company. Considerations to determine risk include gender, smoking habits and other health-related factors, such as lifestyle, physical build and nature of profession, as well as an individual’s personal and family health record. Preferred rates lead to large cost savings to life insurance applicants who qualify.

Premium

The payment required by the life insurance company in order for the insured’s policy to remain in effect. Depending on the terms agreed upon, the premium might be paid at once or in a series of regular payments.

Rated policy

A policy that insures a person who poses a greater-than-average risk to the life insurance company, such as someone with weakened health or a dangerous occupation. This type of life insurance policy sometimes gets issued with particular specifications and exclusions, as well as more costly premiums.

Rating

The practice of charging more than the regular rate for a life insurance policy because the applicant has a greater-than-average risk of death.

Reduced Paid-Up Insurance

A life insurance policy in which a customer uses a cash value from a surrendered non-forfeiture policy to purchase a reduced amount of fully paid-up insurance of the same kind as the surrendered policy.

Reinstatement

The restoration of a life insurance policy that has lapsed. The life insurance company requires the policyholder prove that he or she is in continuing good health. The policyholder must also pay premiums that are past due, along with any interest.

Replacement

The process of buying a new individual life insurance policy that will replace an existing individual policy (or a portion of it). Prospective insurance policyholders must fill out a Life Insurance Disclosure Form in order to guarantee that they fully understand the strengths and weaknesses of each policy.

Rider

A provision of an insurance policy that can be purchased separately to provide further benefits beyond those included in the original policy, at additional cost.

Risk Classification

The step in the life insurance underwriting process in which a company assesses and classifies an applicant’s risk of mortality.

Settlement Options

The ways a policyholder or beneficiary can choose to receive benefits from a policy.

Standard Risk

The risk that is considered normal at standard rates by an underwriter and does not require extra rating.

Substandard Risk

The risk that is considered above average for an individual who does not meet insurance policy requirements when applying. Insurance companies charge higher premiums to customers with substandard risk.

Suicide Clause

The clause in a life insurance policy that indicates the policy coverage amount will not be paid out if the insured person takes his or her own life within a set period immediately after the policy is issued.

Supplementary Contract

A contract allowing the life insurance company to retain the cash sum payable under an insurance policy. In return, the company makes payments in accordance with the terms of the contract.

Surrender Charges

The fee deducted from a life insurance policy pay-out when a policyholder terminates the policy for cash value.

Term

The numbers of years for which the insured person is covered.

Term Life Insurance

A life insurance policy for a specific time period that stipulates the insurance company must deliver a tax-free payment if the insured person dies within that timeframe. Many term policies only cover periods of 5, 10 or 20 years but can be renewed, usually for a higher cost, at the end of the policy.

Underwriter

The person who determines whether the life insurance applicant is insurable, and what the rate should be for that person.

Underwriting

The procedure a life insurance company uses to decide whether to insure an applicant, and at what rate.

Universal Life Insurance

A type of permanent life insurance policy that offers the low-cost protection of term life insurance as well as a savings element, which is invested to allow for cash value to build up over time. The death benefit, savings element and premiums can be reviewed and altered by the policyholder as his or her life circumstances change.

Variable Life Insurance

A form of permanent life insurance that provides permanent coverage to the beneficiary upon the death of the insured person. It is usually the most expensive type of cash-value insurance, because it allows the policyholder to allocate parts of the premium dollars to a separate account within the insurance company’s portfolio (which is comprised of different instruments and investment funds). Furthermore, federal securities laws regulate variable policies as security contracts because they carry investment risks. These policies must therefore be sold with a prospectus.

Variable Universal Life

Cash-value life insurance offering both payments upon the death of the insured, and an investment feature. The premium amount for this type of life insurance is flexible and can be changed depending on the insured’s life circumstances and needs. The investment feature usually includes accounts that function like mutual funds, with exposure to stocks and bonds. Such exposure offers potentially higher rates of return than those offered by a regular universal life insurance or permanent life insurance policy.

Whole Life Insurance

A type of life insurance that has both a permanent life insurance and an investment component. Upon the death of the insured person, the life insurance company makes a payment to the beneficiary. The investment component accumulates a cash value that the policyholder may withdraw or borrow against.

Will

A legal document detailing how the author’s assets should be distributed upon his or her death.

10, 15, 20, 30-Year Insurance Policy

A term life insurance policy that covers the policyholder for a duration of 10, 15, 20 or 30 years (or however many years the insured person chooses as the coverage term). If the policyholder dies during that period, the life insurance company will make a payment to the selected beneficiaries. If the policyholder does not die, the contract expires with no pay-out.

If you’ve made it all the way through this glossary of life insurance terms you a) probably have a lot of time on your hands and b) are an informed consumer ready to search for the life insurance policy that’s right for you.