Like many industries, the world of insurance has its own unique set of terms to describe its products that can be hard to understand unless you work in insurance. This is funny because everyone needs insurance, so why not make it easier to comprehend? To help you understand the information included in a life insurance policy, we’ve gathered some basic terminology in this easy-to-reference overview.
Types of Policies
Term Life Insurance
Term life insurance is a standard insurance policy that provides coverage for a specific period of time. This means if you don’t die within the term, your beneficiary doesn’t get the death benefit and the policy expires. You can select the term that works best for you, and common lengths for term life insurance are 10, 20, or 30 years. One of the challenges for people who purchase term life insurance is deciding how long the policy should last. You may want to have the policy last until you retire or as long as your youngest dependent will need financial support.
Whole Life Insurance
Whole life insurance covers you for as long as you live (as long as premiums are paid on time), at a locked-in rate that won’t increase as you age or if your health status changes. It may also build “cash value” over time, which is money that gets set aside with each payment you make, like a nest egg for the future.
Universal Life Insurance
Universal life insurance is a form of permanent insurance, meaning coverage can last for your lifetime as long as premiums are paid. This can be purchased by individuals but is also regularly offered by employers as group universal life insurance.
Variable Life Insurance
Variable life insurance is a permanent life insurance policy with an investment component. Coverage will remain in place for your lifetime so long as premiums are paid. Every variable life insurance policy has three primary components: Death benefit, Cash value, Premium. Every time you make a premium payment, a portion of it goes towards the cost of insurance and insurer’s fees. This is the money that essentially pays to keep the death benefit in place. The remainder of the premium goes towards the policy’s cash value, which is similar in structure to a brokerage account. The cash value can be invested in certain securities (often called sub-accounts) which resemble mutual funds.
The person or party named by the owner of a life insurance policy to receive the policy benefit.
The person to receive proceeds of a life insurance policy if the primary beneficiary passed away before the insured.
The savings element of a permanent life insurance policy, which represents the policy owner’s interest in the policy.
Convertible Term Life Insurance Policy
A term life insurance policy that gives the policy owner the right to convert the policy to a permanent plan of insurance.
A return on part of the premium.
The amount of the death benefit payable under a life insurance policy.
The person on whose life the policy is issued.
Permanent Life Insurance
Life insurance that provides coverage though the insured’s lifetime and also provides a savings element. Also known as whole life.
As a general rule, the date on which coverage under an insurance policy became effective.
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.