At its most basic, life insurance can be a simple proposition. You pay an insurance company an amount of money each month, and if you die before the end of the term, they will pay those you leave behind. But behind that simplicity lies plenty of different options that can be confusing if you're not familiar with them.
Whole life, term life, beneficiaries, riders, and premium amounts—it's important you know what these terms are to make sure that you are getting the right kind and right amount of life insurance. Here are a few of the most common life insurance terms and their corresponding definitions. Hopefully, this will help as you look to make one of the most important financial decisions of your life.
List of Life Insurance Terms
- Accelerated Death Benefits: In some life insurance policies, some of the death benefits are available even before the insured dies. These accelerated death benefits are usually only available on certain policies in case of chronic or terminal illness.
- Agent: Someone who is licensed to sell insurance. Agents can be either independent (allowing them to sell policies from multiple companies) or direct employees of one specific life insurance company.
- Annuity: A financial product that pays out a specific amount at specific time intervals for life.
- Application: The collection of documents and information that is sent to the insurance company in order to apply for an insurance policy.
- Beneficiary: The person who will receive the death benefit or proceeds of a life insurance policy when the insured dies.
- Contingent Beneficiary: The person who will receive the proceeds of a life insurance policy if the primary beneficiary predeceases or is otherwise unable to receive the proceeds of a life insurance policy.
- Coverage Period: The period of time that a life insurance policy is in effect.
- Death Benefit: The total amount that will be received by a policy's beneficiary upon the death of the insured.
- Effective Date: The exact date that a life insurance policy begins.
- Exclusions: Clauses in an insurance policy that state under what circumstances the policy will not pay out a death benefit. Common exclusions include suicide, risky activity, or misrepresentation.
- Evidence of Insurability: As part of the life insurance application process, the insurance underwriter will examine the insured's health and other information to decide whether they are eligible to be issued an insurance policy.
- Face Value: The total amount of insurance issued with a policy.
- Grace Period: A set period of time after the premium is past due that the policy remains in effect. If the insurance premiums are not paid by the end of the grace period, the insurance policy will lapse.
- Group Coverage: Insurance coverage that is offered by and usually paid for by employers, schools, or other groups. Because the insurance covers multiple people, the premiums are often lower.
- Guaranteed Issue: A specific type of insurance policy where the applicant cannot be denied based on medical history. Premiums for guaranteed issue insurance are often higher than those that are based on medical and biographical information.
- Insurable Interest: Proof that someone will be adversely affected if the insured dies.
- Insurance Policy: The official contract between the insurance company and the policyholder that outlines how the death benefit will be paid out.
- Insured: The person who is covered by the insurance policy. This is often but not always the policyholder.
- Insurer: The company that issues the life insurance policy.
- Lapse: If you do not pay the required insurance premiums by the end of the grace period, your policy will lapse. After a policy lapses, it is no longer in effect, and no benefits will be paid until it is reinstated.
- Life Expectancy: The estimated age that someone is expected to live, based on actuarial tables. Most insurance policies use this information to calculate policy premiums.
- Non-Smoker Rate: According to actuarial information, those who don't smoke will live longer than those who do. Accordingly, most insurance policies will give cheaper premiums to non-smokers.
- Policyholder: The owner of a life insurance policy.
- Premium: The amount that is paid (usually monthly or annually) to keep the life insurance policy active.
- Reinstatement: If a life insurance policy lapses, it must be reinstated for the beneficiaries to eventually receive the benefits.
- Rider: Optional provision that can be purchased to go along with a life insurance policy. Common riders include accidental death, guaranteed insurability, waiver of premium, and long-term care.
- Surrender Value: The amount of value that is returned to the policy owner when a life insurance policy is canceled. Not all types of life insurance have a cash surrender value.
- Term: The length of time a life insurance policy is in effect. A 20-year term policy only pays a death benefit if the insured dies within that 20-year term.
- Term Life Insurance: Life insurance that is good for a specific time period. If the insured dies before the end of the term, the insurance company will pay the face value of the policy as a death benefit.
- Underwriter: An employee of the insurer that examines the application for life insurance and determines if the policy will be issued and what the premiums will be.
- Underwriting: The period of time when the underwriter is reviewing the life insurance application.
- Whole Life Insurance: A specific kind of life insurance that includes both a death benefit and an investment portion. If the insured dies before the end of the term, a death benefit is paid out. The investment portion yields a cash value that can be withdrawn or borrowed against. Premiums for whole life insurance are often significantly higher than those for term life insurance. For most physicians, it's better to get term life insurance than to get whole life insurance.
The White Coat Investor has a list of recommended insurance agents that have been serving the readers of this website for years. If you need more help with or have more questions about your insurance needs, check them out.
The White Coat Investor is filled with posts like this, whether it’s increasing your financial literacy, showing you the best strategies on your path to financial success, or discussing the topic of mental wellness. To discover just how much The White Coat Investor can help you in your financial journey, start here to read some of our most popular posts and to see everything else WCI has to offer. And make sure to sign up for our newsletters to keep up with our newest content.