Life Insurance definitions and terms can be confusing. We created this life insurance glossary so you can find out the definitions with ease. The more you know the better decisions you can make.
Administrative Expense: A life insurance carrier’s cost to operate. It should cover advertising, printing costs, underwriting, medical examinations, facility rent, premium taxes. Expenses are what you plan and are used to calculate dividends and premium rates.
Accelerated Death Benefits: Benefits often paid before the death of the insured, these are similar to living benefits.
Accidental Death Insurance: Usually a rider to a term life insurance policy, that is only paid if the death of the insured happens because of an accident.
Accidental Death and Dismemberment Insurance: A type of insurance policy with a benefit only that only pays out if the insured dies, becomes blind, or is physically dismembered in an accident.
Accrued Interest: Interest that is the interest on a bond, loan, or insurance product that has accumulated since the principal investment.
Agent: A person licensed by the state to negotiate insurance contracts. Usually, they are captive to a single company.
Beneficiary: The individual that receives the life insurance benefit when the insured dies. A beneficiary must have a connection to the insured it may not be just anyone.
Broker: A vendor of insurance that sells life insurance from various companies. Represents the purchaser of the insurance, not any one life insurance company.
Cash Surrender Value: The cash value you would get if you terminate your life insurance coverage voluntarily before a policy is payable by maturity or death. The cash value in
Child Rider: A rider that is usually added to term life insurance to cover a child also for a minimal amount usually to cover burial expenses. Coverage is usually from 15 days of age to 18 to 25 years of age insurance company dependant.
Death Benefit: When the insured dies this is the amount paid to the beneficiary.
Direct Recognition: The earnings rate on any loan against your cash value are affected both positively and negatively when the cash value is used as collateral.
Dividend: A payment made yearly from a whole life insurance policy to the owner of the policy. Dividends maybe not be guaranteed but illustrations will show the dividend payout in accordance with the average.
Estate Plan: It is the preparation of documents such as a will, trust, or advance medical directive. It is done to manage a person’s assets if they were incapacitated or dead. This usually happens with the assistance of an estate attorney. Often there is a team such as an insurance or financial advisor.
Free Look: This is the period of time required by state law after a life insurance contract is delivered to the policy owner if the owner decided not to accept the policy all premiums paid can be refunded. The free look period can differ by state but normally is 10 days long.
Group Life Insurance: Employer provided life insurance (or other large organization). Members of the group must have an association other than to be insured as a group.
Indexed Universal Life Insurance: A version of universal life insurance that gives yearly profits based on a stock market index such as the S&P 500. It is supposed to expose the life insurance policy to the upsides of the market without the downsides of investing in equities.
Insured: The person, group, or organization whose life or property is covered by an insurance policy. The death benefit will be paid when this person dies to the beneficiary in the policy.
Insurer : The life insurance carrier or company
Intestate: When a person dies without a will.
Joint First-To-Die: Coverage for two people on a life insurance policy that will pay the death benefit to the beneficiary when the first person dies.
Joint Last-To-Die: Coverage for two people on a life insurance policy that will pay the death benefit to the benficary only after both people have died.
Life Expectancy: When actuarial life tables show the age to which a person will most likely live.
Living Benefits: A life insurance benefit that allows a portion of an advanced cash payment before the insured dies. Usually covers Critical Illness, Chronic Illness, and Terminal Illness.
Long Term Care Rider: A life insurance rider that is tied to permanent life insurance so that insurance may be used for a nursing home or receive home care.
Medical Exam: Also known as the physical exam it is the exam completed during the underwriting period
Mortality : The rate of death at a given age and aliment. Actuaries use to calculate life insurance risk.
Mortgage Life Insurance: Life insurance that makes the remaining mortgage payment directly to the if a homeowner dies, features include rising premium and a declining benefit. Should only be used by people with health issues that cannot qualify for term life insurance.
Modified Endowment Contract (MEC): If too much money is paid into a life insurance contract, the policy is considered to be a modified endowment contract and loses it’s tax benefits. This is usually only in the case of permanent life insurance that is being used as an investment vehicle.
Mutual Insurance Company: A mutual insurance company is one owned by the policy holders.
Non-Direct Recognition: The earnings rate on any cash value loan on your permanent life insurance is unaffected by any loans you make against it.
Option A Rider: This is where the death benefit stays static on a permanent life insurance policy. THe benefit is usually much higher than the cash value put in the policy and the cash value never meets the death benefit.
Option B Rider: This is where the death benefit rises on a permanent life insurance policy. This is primarily used when one wants to use permanent life insurance as an investment.
Paid Up Additions Rider: This rider uses the policy dividends to purchase more insurance. It assists policyholders in increasing their death benefit by increasing the policy’s cash value.
Participating Insurance: When entities or individuals own a policy receive a portion of surplus earnings from a life insurance companies investments. All policy owners who have participating policies will receive a policy dividend.
Policy Loan: A loan a life insurance company makes to owners of their policies. Found only in permanent insurance such as whole or universal life insurance.
Premium: Amount of money paid into a life insurance contract. Premium and cost of insurance match in term life contracts as this is pure insurance.
Protection Universal Life: This would be an Option 1 (A) type of universal life insurance with a larger death benefit but gains cash value slowly. This is permanent life insurance that should have the ability to stop payments if needed.
Rating: Charging above the normal rate for life insurance policies because the applicant has a higher than average risk of death.
Return of Premium Term: This is a term life policy where you receive the premium you have paid into the policy. Negatives of this type of policy are it costs twice the amount of a standard term policy.
Risk: Is the chance something harmful or unexpected could happen during the term of a policy. Age and health are examples of life insurance risk.
Substandard Risk: When an individual does not meet insurance policy requirements upon applying. Insurance carriers often charge premiums that are high with insureds that are a substandard risk. Examples are usually health issues.
Suicide Clause: If the insured takes their own life within a set period (usually 2 years by law) after the policy is issued.
Surrender Charges: Fee’s subtracted from life insurance policies when the holder of the policy terminates the policy for cash value.
Term Life Insurance: Is defined as pure life insurance, it is the class of life insurance that guarantees payment of a purchased tax-free death benefit if the insured person dies during the term they are covered for.
Term Life Rider: This is usually added to a permanent life insurance policy to make up for an Option B permanent life insurance policy that has a low but rising death benefit.
Term Conversion Rider: This rider lets a policy owner covert a term life policy to whole life insurance.
Trust: an arrangement whereby a person (a trustee) holds property as its nominal owner for the good of one or more beneficiaries. This is usually a part of an estate plan.
Underwriter: The person who decides whether the applicant for life insurance is insurable and the rate for the insured by using actuarial tables.
Underwriting: The method a life insurance carrier uses to determine if they should insure an applicant at the rate the applicant qualifies for.
Universal Life Insurance: Life Insurance that is flexible in it’s payment structure (premium), and a cash value that is not guaranteed.
Variable Universal Life: Investment based life insurance that usually contains a mutual fund exchange-traded fund or stock. The goal here is to get maximum growth to pass on to heirs or beneficiaries. Rates of return could be higher than the average permanent of universal life insurancebut has the dangers of being exposed to the market.
Waiver of Premium Rider: Will waive life insurance premiums in the case of total disability of the insured.
Whole Life Insurance: A class of permanent life insurance where the person covered is insured for the extent of their life. Does not expire like term life insurance as long as it is paid. It usually contains cash value. You must maintain payments to keep it.
Will: A legal document that explains how the deceased assets should be divided upon their death.
If you found any of these life insurance definitions confusing we invite you to read more through our blog of articles surround life insurance. Remember you can contact us at any time to discuss any of these definitions.