The “fear of the unknown” applies to many aspects of life as we know it. It can prevent someone from trying a new food, taking an expeditious trip around the world, or even pursuing a life insurance policy.
While nothing in finance is totally straightforward, the complex world of life insurance may prevent a lot of people from looking into something they may very well need. In fact, according to a study of 2,000 adults, more than half of the millennials surveyed overestimated the average annual cost of life insurance by five times the actual amount.
The lack of awareness surrounding life insurance, however, should not create a barrier to entry. A simple understanding of the industry’s general terminology goes a long way when it comes to shaping a more informed consumer.
Here are some key terms and definitions to help you get started.
The policy is a contract between an insured (the policyholder) and the insurance company, which states all of the plan's details as well as legal terms and conditions.
A quote is an estimate for the cost of life insurance, specifically the monthly premium paid to the insurance company. The quote is based on personal information (e.g., health, finances) provided by the applicant.
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The risk assessment of an applicant based on several contributing factors (e.g., age, health, medical history, hobbies, etc.), performed by an underwriter on behalf of the insurance company to formally approve the policy applied for.
Every life insurance policy includes a death benefit, which represents the face amount (or coverage amount) paid to the beneficiary in the event that the insured dies during the term (time period) of coverage.
The recipient (or recipients) of the death benefit, as determined by the policyholder. A contingent beneficiary can also be selected (it is never required to have a contingent listed) in the event that a primary beneficiary cannot claim the death benefit.
The health exam that is typically required for an applicant to qualify for certain types of life insurance. While the exam determines what classification (or rating) a policyholder would fall under, it is not required for all policies.
Term Life Insurance
A type of life insurance policy with a predetermined time frame for coverage (i.e., the term). Term life plans typically range from 10 to 30 years, and are considered to have more affordable premiums.
Whole Life Insurance
The most common type of permanent life insurance (as opposed to term life), whole life provides lifelong coverage (as well as an investment component) for the policyholder. As a result, premiums are more expensive compared to term life plans.
Permanent (e.g., whole life) insurance policies include a cash value investment, separate from the death benefit. Part of the premium payment is deposited into an account that earns interest over time, which can also be withdrawn from or borrowed against.
Universal Life Insurance
Another type of permanent life insurance, universal life is the most flexible form of coverage and is even broken down into three sub-policy types: guaranteed universal life, indexed universal life, and variable universal life, which offer varied cost and investment options.
A provision or addition to a life insurance policy that expands the benefits available to the policyholder and beneficiary, which can be purchased separately at an additional cost. (E.g. guaranteed insurability)
Accidental Death Insurance
Either as a standalone policy or as a rider to an existing policy, accidental death insurance (as its name suggests) provides coverage in the event that the insured’s death is caused by certain qualifying accidental events (e.g., unintentional falls, car accidents).
Final Expenses Insurance
A limited (in coverage amount) life insurance policy intended just to pay for the deceased’s final expenses, including medical, funeral, and burial costs.
The date an insured person’s coverage officially goes into effect, whether it’s a term or permanent life insurance policy. A term life policy will remain in effect until the termination date, while a permanent life policy will extend until the date of the policyholder’s passing or to a certain age (even as old as an age of 100 years).
A list of extenuating circumstances and causes of death included in a policy’s terms and conditions, which if they were to occur would prevent a beneficiary from claiming the death benefit. Examples include death caused by an illegal activity or the withholding of pertinent health information in the policy application form within the first two years.
The period of time (generally 30 days) from when a monthly premium is due to when the insurance company can stop coverage if the policyholder has failed to make their payment.
If a policyholder fails to pay their premium by a certain date, the policy will become lapsed, meaning coverage will no longer be in effect. A policyholder can reinstate their policy (potentially with the same premium and death benefit), but would have to re-qualify and pay any unpaid balance first.
The individual who has purchased coverage on the insured individual’s life.
Instead of assigning one or multiple individuals as beneficiary, a life insurance policy can also place the death benefit into a trust that can be accessed by beneficiaries or trustees at the discretion of the policyholder.
The payment made by the policy holder to the insurance company for their life insurance policy. Can be paid monthly, quarterly, semi-annual, or annually.
Choosing the right life insurance policy should not be a stressful endeavor. While Fiona & LeapLife have agents that are always available to guide you through the process, it doesn’t hurt to have a better understanding of all the key terms that go into picking a plan, as well as the differences between the main policy types. With Fiona & LeapLife, you can get matched with personalized life insurance policy quotes from top carriers in less than 60 seconds.