Like many industries, the world of life insurance terms has its own unique set of vocabulary to describe its products. To help you understand the information included in a life insurance policy, we’ve gathered some basic terminology in this easy-to-reference overview.
Beneficiary: The person or party named by the owner of a life insurance policy to receive the policy benefit.
Cash Value: The savings element of a permanent life insurance policy, which represents the policy owner’s interest in the policy.
Contingent Beneficiary: The party designated to receive proceeds of a life insurance policy following the insured’s death if the primary beneficiary predeceased the insured.
Convertible Term Insurance Policy: A term life insurance policy that gives the policy owner the right to convert the policy to a permanent plan of insurance.
Dividend: A return of part of the premium.
Face Amount: The amount of the death benefit payable under a life insurance policy. This is the coverage amount that would be provided if the unthinkable happens; essentially, the amount that would be printed on the check that’s provided to the individual/individuals listed on the policy.
Health Class: Life insurance is priced based on a number of factors – age, smoker/non-smoker, health conditions, medication, etc. Estimates could change once exams are completed.
Irrevocable Beneficiary: A life insurance policy beneficiary who has a vested interest in the policy proceeds even during the insured’s lifetime because the policy owner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.
This concept can be confusing, so let’s look at an example… the insured has a financial obligation to someone and they want to be sure that the person/institutions will receive the payment. They may make them an irrevocable beneficiary. Or children will be an irrevocable beneficiary, especially if someone is on a second marriage, that way the children will be guaranteed the amount designated.
Insurable Interest: The interest an insurance policy owner has in the risk that is insured. The owner of a life insurance policy has an insurable interest in the insured when the policy owner is likely to benefit if the insured continues to live and is likely to suffer some loss or detriment if the insured dies.
Let’s look at an example… a wife or husband has an insurable interest on each other since they would suffer a financial loss if one or the other passed away. Another example could be a company having an insurable interest in a key employee with certain skills like a president or CEO since they would suffer a financial loss with their passing.
Insured Life: The person on whose life the policy is issued.
Original Age Conversion: A conversion of a term life insurance policy to a permanent plan of insurance at a premium rate, based on the insured’s age when the original term policy was purchased.
Someone may use this option if they took out a term policy but over the life of the policy had health issues arise that would preclude them from getting a new policy. A policy with a conversion option would allow them to convert to a permanent product like whole life before a certain age without underwriting. The policy would be based on their current age but would be written as if they were in the same health as when they took out the original policy. This option would allow them to continue with coverage when they may have been unable to do so if they had to get a new fully underwritten policy.
Permanent Life Insurance: Life insurance that provides coverage throughout the insured’s lifetime and also provides a savings element.
Policy Anniversary: As a general rule, the date on which coverage under an insurance policy became effective.
Premiums: Amount paid to the insurance company to buy a policy and keep it in force.
Renewable Term Life Insurance: A term life insurance policy that can be renewed at the end of the policy term.
This may be an option for someone who has health conditions and cannot get other coverage. The renewable term would allow them to continue with the policy at an increased rate usually each year. It’s not a great option but used more as last resort.
Return of Premium Life Insurance: You buy a policy, perhaps for a 20- or 30-year term. If you die during that time, your beneficiaries receive the death benefit. If you outlive the policy, you get back exactly what you paid in (with no interest). The money back is not taxable.
- Policy Value: Applies only to Return of Premium Life Insurance. The total amount of premium paid for that specific policy over the life of the policy.
- Paid-Up Insurance: Applies only to Return of Premium Life Insurance terms. The amount of coverage that you could elect to put into place at the end of the term, and this Paid-Up Insurance amount would be provided at the time of death, regardless of when that happens, and there would be no additional premium that would need to be paid.
Term Length: The amount of time a policy would be in place.
Term Life Insurance: A life insurance policy that provides a stated benefit upon the holder’s death, provided that the death occurs within a certain specified time period. Policy does not build up a cash value.
Universal Life Insurance: A type of flexible permanent life insurance terms offering both term life insurance as well as a savings element, which is invested to provide a cash value buildup. The death benefit, savings element and premiums can be reviewed and altered as a policyholder’s circumstances change.
Whole Life Insurance: A basic type of permanent life insurance terms. It provides coverage that lasts a lifetime and also builds up a cash value that you can borrow against, withdraw or use to pay future premiums.
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Life insurance and its unique set of vocabulary can be confusing and we are always here to help. If you have any further questions or would like to speak with one of trusted advisors, contact us today.