Life insurance terminology: 20 essential terms defined
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Life insurance terminology can seem overwhelming at first. But once you get to know the basics, it’s easy to understand. We’ve pulled together 20 terms that will help you while you research the best insurance options for your needs.
Importance of understanding life insurance terminologies
Understanding common life insurance terms can make it easier to:
- Interpret policy language more accurately.
- Compare features across options.
- Ask clearer questions.
Let’s look at the terms that appear most often and what they mean.
Understanding important life insurance terms
1. Types of Insurance
Term Life Insurance – Often less expensive, term life insurance provides straightforward protection for a specific period of time. This period could last anywhere from one to 20 years or more.
Permanent Life Insurance (or “Perm”) - permanent life offers lifetime death benefit offers lifetime death benefit protection.
2. Policy
This is the official, legal document that 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
Underwriting is the process 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 even 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. These proceeds are not considered income to the beneficiary, which means no federal taxes are due when the beneficiary receives them.*
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 from the insured person, a relative of the insured, a partnership or even a corporation.
9. Application
After you’ve decided which type of insurance works for you, you’ll submit an application which details the information the insurance company needs to assess their risk. The application process often includes a basic medical checkup. That said, 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 1 or 2 times your annual salary. It is usually terminated when employment ends or the insured individual changes jobs.
11. Grace period
A grace period is the short time after a premium due date when your policy remains in effect even if payment has not yet been made. It gives you a chance to make up the missed payment before your coverage is affected.
12. Exclusions
Exclusions are the specific situations or causes that a policy does not cover. They are important because they define the limits of the protection you receive. For example, certain events or circumstances may be excluded from coverage depending on the terms of the policy. Reviewing your policy can help you understand what exclusions may apply.
13. Riders
Riders are optional additions that can be attached to a life insurance policy to expand or customize coverage. They are selected based on the protection a person wants beyond their base policy.
14. Cash value
Cash value is the savings component that can be built in certain permanent life insurance policies over time. It is separate from the death benefit and may increase according to the policy terms.
15. Living benefits
Living benefits are features that may let you use part of your policy benefits while you are still alive (if you meet the requirements). They can provide financial support in qualifying situations - such as a serious illness or other covered circumstance - before a death benefit is paid.
16. No medical exam life insurance
No medical exam life insurance is life insurance that can be applied for without a medical exam. The application process may be simpler, though eligibility and pricing still depend on the insurer’s rules.
17. Claim
A claim is the formal request made to the insurance company for payment under the policy. In life insurance, this is typically filed by a beneficiary after the insured person dies.
18. Policyholder
The policyholder is the person who owns the life insurance policy. This person is responsible for maintaining the policy and making changes when needed.
19. Face amount
Face amount is the amount stated in the policy that is intended to be paid as the death benefit, subject to the policy terms. It is one of the main figures used when reviewing coverage.
20. Lapse
A lapse happens when a policy ends because required premiums were not paid. Once a policy lapses, the coverage is no longer active unless it is restored under the policy rules.
Conclusion
A clear grasp of policy language can make the decision process more practical and less intimidating. It gives you a stronger foundation to assess what matters most and move forward with greater confidence.
If you already have coverage, it may be a good time to revisit the details. If you’re still comparing options, connect with a John Hancock professional to continue the conversation.
Disclaimer:
The information in this article is for educational purposes only and is not intended to provide legal, tax, or financial advice. For guidance on your individual situation, please consult a qualified professional.
*Life insurance death benefit proceeds are generally excludable from the beneficiary’s gross income for federal income tax purposes. There are a few exceptions such as when a life insurance policy has been transferred for valuable consideration. In addition, state and estate taxes may apply in certain instances. Comments on taxation are based on John Hancock’s understanding of current tax law, which is subject to change.
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