Life insurance defined: 10 terms you need to know

At first glance, life insurance terminology can seem overwhelming. Once you get to know the basics, it’s easy to understand. We’ve pulled together a few terms that will help you as you research the best insurance options for your needs. 

1. Types of Insurance

Term Life Insurance – Often less expensive, Term Life provides straightforward protection for a specific period of time. This period could be for 10, 15 or 20 years.
 

Permanent Life Insurance (or “Perm”) - Permanent Life offers lifetime death benefit protection.

2. Policy

This is the official, legal document which states the terms of the policy owner’s insurance. The policy will name the insured, the owner (often the same person, but not always) the death benefit and the beneficiary.

3. Underwriting

Often viewed as a mysterious process, underwriting is simply where factors are evaluated relating to the customer’s current health, medical history, lifestyle habits, hobbies, occupation and financial profile to determine eligibility for coverage as well as what the appropriate premiums should be.

4. Premium 

This is the payment, made by the customer, to an insurance company to pay for the policy. The premium may be paid annually, semi-annually, quarterly or monthly. 

5. Beneficiary 

The person, or people, named in the policy who will receive the insurance proceeds when the insured dies. The beneficiary can be anyone or anything, such as a relative, a charity or your pet.

6. Death Benefit

This is the dollar amount that will be paid out to a beneficiary when the insured under the policy dies. If you have a policy with a $250,000 death benefit, then that amount will be paid to whom you’ve named as your beneficiary. Here’s a tip: the proceeds are not considered income to the beneficiary, therefore no federal taxes are due.

7. Insured

The insured is the person whose life is insured by the policy.  When the insured person dies, the death benefit proceeds will be paid to the beneficiary. The insured may or may not be the owner of the policy.

8. Owner  

The person, or people, who own a life insurance policy. The owner may be anyone, including the insured person, a relative of the insured, a partnership or a corporation.

9. Application

After you’ve decided which type of insurance works for you, you’ll submit an application which details information the insurance company needs to assess their risk. The application process often includes a basic medical checkup; however some insurance companies don’t require this. The application is used by underwriting to determine how much you’ll pay for coverage.

10. Group Life Insurance

This type of insurance is often a part of an overall benefits package for a defined group. Many times, group insurance has a limited face amount, such as 1X or 2X annual salary, and is usually terminated when employment ends or the insured changes jobs.