Life Insurance Definitions
Life insurance and the relating terminology can be confusing, so we have put together a list of definitions to help you gain a better understanding on life insurance before you buy a policy.
Accelerated Death Benefit Rider
What Is The Accelerated Death Benefit Rider?
An accelerated death benefit rider is a additional coverage option that will pay out part of the overall death benefit in the event that the insured is diagnosed to be terminally ill. These riders require submission of medical records and physician statements stating that the condition is terminal. The amount paid out can be up to 80% of the face value of the policy and often has a separate fee added into the premium of the policy you choose.
Accidental Death and Dismemberment Rider
What is a Accidental Death and Dismemberment Rider?
An Accidental Death and Dismemberment Rider (AD&D) is an optional additional coverage you can purchase that will increase the overall death benefit in the event that death or loss of limb occurs as a result to an accident. Typically these policies are not recommended unless you are exposed high risk situations or you are unable to get coverage under more traditional forms of life insurance.
What is an Actuarial Table?
In the insurance world, underwriters use actuarial tables to determine the statistical probability of risk. In life insurance it is called a mortality table which is used to determine the probable life expectancy of an applicant.
What is Adverse Selection?
Adverse selection is when demand for insurance has a correlation to the the amount of risk involved. During underwriting, your application with the questions are reviewed and if there are higher risk activities or behaviors that were indicated on the application, the premium is increased accordingly in order to prevent the insurance company from obtaining a loss.
Annual Renewable Term Life Insurance
What is Annual Renewable Term Life Insurance?
This is a level term policy that lasts only one year and renews every year with a higher premium. Annual Renewable Term is the life insurance foundation inside a Universal Life policy in many cases, causing premiums to steadily increase to cover the cost of insurance.
Attending Physician Statement (APS)
What is an Attending Physician Statement (APS)?
This is a summary of your medical history that is requested by life insurance underwriters as part of the underwriting process. As these can be expensive for the insurer, they are not always requested unless there are some less than positive results on your paramedical exam. Attending Physician Statement (APS) can slow down the underwriting process as it can take weeks for the insurance company to receive it from the requested doctor.
What is Avocation?
A small hobby or venture. Hobbies can have a negative impact on life insurance premiums, like skydiving or racing. The more exposure to risk you have, the higher the rate for life insurance will be.
What is a Beneficiary?
In life insurance, the beneficiary is the one who receives the death benefit for the life insurance policy in the event of your death. This can be an individual, an organization, or even charities you support. You may also have multiple beneficiaries who share in the death benefit based on your assignment of benefit percentage.
Cash Surrender Value
What is Cash Surrender Value?
The surrender value is the cash value less any loans or fees of a permanent life insurance in the event you decide to surrender your policy and cash out your cash value. Surrendering a policy may also come with additional administrative fees that will be taken out of the cash value as well.
Cash Value Life Insurance
What is Cash Value Life Insurance?
A permanent form of life insurance that grows in monetary value during the life of the insured. The opposite of term life insurance.
Child Protection Rider
What is a Child Protection Rider?
An optional add-on to a life insurance policy that provides coverage for all children and, in some cases, is able to converted into a standalone policy after the child reaches the required age. Coverage is typically very minimal with this rider.
What is Concealment?
When an insurance applicant intentionally omits information that could be relevant to underwriters during the underwriting process. Concealment could lead to benefits not being paid out in the event there was a claim or full cancellation.
Critical Illness Rider
What is a Critical Illness Rider?
An optional add-on to a life insurance policy that pays out a portion of the death benefit in the event you are diagnosed with a critical illness as defined in the life insurance policy obtained.
What is a Death Benefit?
This is the face value of the life insurance policy that is to be paid out to your beneficaries in the event of your death and the total amount paid out (less any loans against the policy) is usually in a nontaxable lump sum payment.
Decreasing Term Life Insurance
What is Decreasing Term Life Insurance?
Usually sold as “Mortgage Protection Insurance”, Decreasing Term Life Insurance is a type of term life insurance that charges the same premium, but the death benefit decreases over time. Generally speaking, most insurance professionals advise against this type of life insurance.
Disability Income Rider
What is a Disability Income Rider?
An optional add-on to a life insurance policy that provides income replacement in the event you become disabled and are unable to work.
What is an Effective Date?
The date when a policy becomes effective and when coverage begins.
What is an Elimination Period?
The predetermined length of time between when an injury happens and when one receives benefit payments.
What is an Exclusion?
Defined provisions that explain what is covered and when benefits will not be paid inside a life insurance policy.
What is Face Value?
The contracted dollar figure the life insurance policy will pay out.
What is a Grace Period?
A predetermined time period where the policy stays in force even if there is not a premium paid.
What is Group Coverage?
Insurance coverage provided by the employer or organization and provided to employees and members as part of their association.
What is Guaranteed Issue?
When an insurance coverage cannot be refused based on medical issues or history.
What is a Hazard?
When there is a situation that makes a loss more likely. Insurance underwriting involves properly analyzing the hazards an applicant poses and setting premiums accordingly.
Increasing Term Life Insurance
What is Increasing Term Life Insurance?
A life insurance policy where the death benefit and the premium increases over time and is usually used as a temporary life insurance supplement to a permanent life insurance policy.
What is an Insurance Policy?
A contracted arrangement between an individual or organization and an insurance company where terms of coverage are provided in a legal contract in exchange for premiums paid.
What is an Insured?
The individual or organization that receives coverage by an insurance company.
What is an Insurer?
A company that provides insurance protection in return for premiums. Also known as a insurance company or insurance carrier.
What is Irrevocable?
When a policyholder or insured is unable to change the terms of the insurance contract without the authorization of the beneficiary.
What is Lapsed?
When an insurance policy has not been paid and is no longer in force.
Level Term Life Insurance
What is Level Term Life Insurance?
The most popular form of term life insurance where the death benefit and premium amount are guaranteed to stay the same throughout the life (term) of the insurance policy.
Long-Term Care Rider
What is a Long-Term Care Rider?
An optional add-on to a life insurance policy that provides a set amount of benefits in the event the insured has a chronic illness and requires daily assistance of care which is deducted from the death benefit in most cases. These riders will usually have a maximum per month payout to help cover the cost for care when the insured is unable to care for themselves.
Any permanent life insurance policy that does not provide dividends issued by the insurer for the benefit of the policy holder.
Mutual life insurance companies are owned by the policyholders and dividends are generally paid to the the policy holders on profits the company makes which can increase the value of the permanent policy; however, stock based life insurance companies (e.g. Allstate) pay these dividends to their share holders instead.
What is Open Enrollment?
The time every year where employees enroll in or make changes to their benefit packages which include health insurance, retirement accounts, and group life insurance.
In many cases, open enrollment begins in October and changes begin the following January.
What is a Paramedical Exam?
A requested health exam done by medical professionals that is paid for by the life insurance company and involves various tests and documentation of vital signs. Most common tests are a blood draw and urinalysis.
Permanent Life Insurance
What is Permanent Life Insurance?
Life insurance that is designed to last your entire life and often builds a cash value. The opposite of term life insurance.
What is a Policyholder?
The person who owns an insurance product.
What is a Premium?
The amount of money paid to an insurance company in exchange for some sort of coverage or protection. Can be paid monthly, quarterly, or annually depending on the options provided by the insurance company.
What is a Primary Beneficiary?
The first person(s) to receive the death benefits of a life insurance policy in the event that death occurs while the policy is in force.
Private Mortgage Insurance
What is Private Mortgage Insurance?
An insurance policy that assures the mortgage holder a financial reimbursement in the event the mortgagor (typically the homeowner) fails to make payments. This type of policy is required in most conventional mortgages where there is less than 20% equity in the property at time of signing.
This is not the same as Mortgage Protection Insurance (decreasing term life insurance).
What is a Rating?
Used in underwriting, this determines the amount of premium you pay based on how much risk you pose to the insuring company.
Return of Premium Rider
What is a Return of Premium Rider?
Also known as ROP, this optional add-on is seen on term life insurance policies and provides a guaranteed refund of part or all premiums paid to the insurance company for your coverage. Generally these types of riders increase the overall cost of term life insurance by at least three times, but allows for it to be returned at a later date.
What are Riders?
Riders are optional add-ons to a life insurance policy that provides extra coverage or benefits that expands the scope of the life insurance policy. These extra coverage clauses will often come with an increase in premium for the life of the rider.
Senior (Final Expense) Life Insurance
What is Senior (Final Expense) Life Insurance?
A permanent life insurance policy that covers death related costs and designed primarily for older individuals. These insurance policies usually have a maximum face value around $25,000 and are meant to supplement other types of life insurance.
What is a Settlement?
A payout on a life insurance policy or annuity.
What is Standard Risk?
When an applicant for an insurance policy is rated as an average risk.
What is a Substandard Risk?
When an applicant possesses adverse circumstances and characteristics that increases the amount risk posed to an insurer.
What is Surrender?
A voluntary return of a permanent policy which cancels the coverage inside the policy and cashes out any remaining cash value attached to the canceled policy.
What is Survivor Protection?
The main reason one purchases life insurance- to ensure the financial protection of the insured’s survivors.
Survivorship Life Insurance
A life insurance policy that covers two people and pays out when the second person dies. Also known as “second to die” insurance.
What is a Term?
A set period of time that defines the length of coverage in a term life insurance policy.
Term Conversion Rider
What is a Term Conversion Rider?
An optional add-on to a life insurance policy that gives the insured the ability to convert all or part of their term life insurance coverage into a permanent policy without additional medical exam. In many cases this rider is provided free of charge.
What is Term Date?
The date a term life insurance policy expires.
Term Life Insurance
What is Term Life Insurance?
A temporary life insurance policy that provides a contracted dollar amount for a specified period of time and pays out in the event of the death of the insured. The opposite of permanent life insurance.
Time Payment of Claims
What is Time Payment of Claims?
A mandatory provision that requires claims to be paid at least once per month.
What is Underwriting?
Underwriting is the process where insurance applications and requested records are reviewed the class and premium are determined based on the amount of risk the applicant presents to the insurance company.
Universal Life Insurance
What is Universal Life Insurance?
A type of permanent life insurance that provides term life insurance coverage as an annual renewable term policy while combined with a cash account that can generate cash value through using financial vehicles like money market accounts, index funds, or mutual funds depending on the type of Universal Life policies.
Variable Life Insurance
What is Variable Life Insurance?
A permanent life insurance policy where cash value will fluctuate based on the performance of investments held under the cash account portion of the policy.
Variable Universal Life Insurance
What is Variable Universal Life Insurance?
A universal life policy where the cash account holds variable investment vehicles like mutual funds and whose cash value can fluctuate based on the performance of those vehicles.
What is a Waiting Period?
The time-frame between payment of a claim and when the claim was filed.
Waiver Of Premium Rider
What is a Waiver Of Premium Rider?
An optional add-on to a life insurance policy that waives the premium for that policy in the event you become disabled and unable to work based upon the terms of the insurance policy.
Whole Life Insurance
What is Whole Life Insurance?
A permanent life insurance policy that provides insurance coverage for the entire life of the insured and generates cash value.