There are many words and phrases that are unique to the life insurance industry, and if you're shopping for life insurance, it's likely you'll come across some you aren't familiar with. Below you'll find a list of common phrases and their definitions from the National Association of Insurance Commissioners and Insurance Information Institute as they relate to life insurance policies.
Additionally, if you are ever confused about terminology in your policy, reach out to your insurance agent or provider and ask them to explain what terms and how it impacts your coverage. Being an informed consumer is the best way to protect yourself and assets.
What is life insurance?
Life insurance is a contract between you and the life insurance company. You pay premiums (monthly or annually) for a payout that your living relatives will receive, known as the death benefit. Should you die, the insurance company pays the death benefit to your chosen beneficiary.
The best life insurance policy for you depends on your budget as well as your financial goals. There are two main types of life insurance policies to choose from: permanent life and term life.
Definition of life insurance terms
A
Accident insurance— Insurance for unforeseen bodily injury
Accident only— An insurance contract that provides coverage, singly or in combination, for death, dismemberment, disability, or hospital and medical care caused by or necessitated as a result of accident or specified kinds of accident.
Accident only or AD&D— An insurance policy that provides coverage, singly or in combination, for death, dismemberment, disability, or hospital and medical care caused by or necessitated as a result of accident or specified kinds of accidents. Types of coverage include student accident, sports accident, travel accident, blanket accident, specific accident or accidental death and dismemberment (AD&D).
Accidental bodily injury— Unexpected injury to a person
Accidental death and dismemberment— An insurance contract that pays a stated benefit in the event of death and/or dismemberment caused by accident or specified kinds of accidents
Actuarial report— Also known as an "Actuarial Memorandum." A report from an actuary summarizing conclusions, recommendations, and the methodology used to come to an opinion about risk assessment.
Actuary— A business professional who analyzes probabilities of risk and risk management including calculation of premiums, dividends, and other applicable insurance industry standards
Agent— An individual who sells, services, or negotiates insurance policies either on behalf of a company or independently
Annual renewable term life insurance— Also referred to as ART. A policy that renews yearly, up to a specified age, even if your health (or other factors) would cause you to be rejected if you applied for a new life insurance policy.
B
Beneficiary— An individual or trust eligible to receive payment of the death benefit of a life insurance policy
Broker— An individual who receives commissions from the sale and service of insurance policies. These individuals work on behalf of the customer and are not restricted to selling policies for a specific company but commissions are paid by the company with which the sale was made.
Burial insurance— Also known as "final expense" insurance. A type of guaranteed issue policy that can be term or whole life, with a low death benefit that covers funeral and burial expenses.
C
Cash surrender value— Giving up a permanent life insurance policy that has cash value.
Cash value life insurance — A permanent life insurance policy that earns cash value in addition to a death benefit.
Child protection rider — Allows you to add a child to your life insurance policy
Claim — A request made by the insured for insurer remittance of payment due to loss incurred and covered under the policy agreement.
Contestability period— If you die within the first two years of coverage, the insurance company can contest paying out death benefits. If it is discovered that the policyholder lied on the application or failed to disclose important facts, the insurance company can invalidate the policy. Common in guaranteed issue and simplified issue policies and also when death is by suicide.
Convertible term insurance policy— A term life insurance policy that can be converted into permanent life insurance without a medical assessment. The insurer is required to renew the policy regardless of the health of the insured subject to policy conditions.
Credit life insurance— A policy assigning the creditor as the beneficiary for insurance on a debtor, thereby remitting balance of payment to creditor upon death of debtor
D
Date of issue — Date when an insurance company issues a policy
Death benefit— The payout the beneficiary receives upon the death of a life insurance policyholder
Disability income— A policy designed to compensate insured individuals for a portion of the income they lose because of a disabling injury or illness
Disability income - long-term— Policies that provide a weekly or monthly income benefit for more than five years for individual coverage and more than one year for group coverage for full or partial disability arising from accident and/or sickness
Disability income - short-term— A policy that provides a weekly or monthly income benefit for up to five years for individual coverage and up to one year for group coverage for full or partial disability arising from accident and/or sickness.
E
Effective date — Date on which an insurance policy goes into force
Endorsement— An amendment or rider to a policy adjusting the coverages and taking precedence over the general contract
F
Face amount— The value of an insurance policy to be provided upon maturity date or death
Final expense— A type of guarantee- issue policy that can be term or whole life, with a low death benefit that covers funeral and burial expenses
G
Grace period— The amount of time you have to make a payment after the due date and bring your life insurance policy back to good standing
Group life insurance— Employer-provided life insurance that is usually offered for free. If you are discharged, retire, or quit, you will lose coverage.
Guaranteed issue— A policy that is easier to get because it doesn't require a medical exam and only asks a few simple health questions at most. Also, the policy might not pay a full death benefit for the first few years of coverage.
Guaranteed universal life insurance— A type of permanent life insurance policy with the flexibility to change your premium, death benefit, and cash value over time
I
Insurable interest— If you want to buy life insurance on someone else, you must have an "insurable interest" in their life, meaning you will suffer if they die.
Insurance— An economic device transferring risk from an individual to a company and reducing the uncertainty of risk via pooling
Insured— Party(ies) covered by an insurance policy
Insurer— An insurer or reinsurer authorized to write property and/or casualty insurance under the laws of any state
J
Joint life insurance— Also known as "second to die" or survivorship life insurance. Fased on two people with an insurable interest (married couple or business partners) and doesn't pay until both people die. Typically used by high net worth individuals to lessen the estate tax burden on inheritances.
L
Lapse - Termination of a policy due to failure to pay the required renewal premium
Level premium insurance— Life insurance policy for which the cost is equally distributed over the term of the premium period, remaining constant throughout
Limits— The maximum value to be derived from a policy
Living benefits rider— A rider attached to a life insurance policy providing long term care for the terminally ill
Long-term care— Designed to cover long-term services for personal and custodial care later in life and includes in-home caregiving, assisted living, or nursing home care
P
Paramedical exam — A medical exam required as part of the life insurance underwriting process where a paramedical professional takes blood and urine samples.
Permanent life insurance— A life insurance policy that never expires and has a cash value component in addition to death benefits
Policy— A written contract ratifying the legality of an insurance agreement
Policyholder — The person who is issued the policy
Policy period — Time period during which insurance coverage is in effect
Premium — Money charged for the insurance coverage reflecting expectation of loss
R
Renewable term insurance— Also known as annual renewable term (ART). Insurance that is renewable for a limited number of successive terms by the policyholder and is not contingent upon medical examination
Return of premium rider — For most types of term insurance, if you haven't had a claim under the policy by the time it expires, you get no refund. But some insurers have created term life with a "return of premium" feature, which returns part or all of the money you've already paid if you haven't used the policy once your term ends.
Riders — An amendment to a policy agreement
S
Simplified issue— No medical exam is required, but you still have to complete a health questionnaire and provide access to medical records. If you fail to disclose a condition and die, the insurance company can deny death benefits to your beneficiaries.
Standard risk — A person who, according to a company's underwriting standards, is considered a normal risk and insurable at standard rates. High or low risk candidates may qualify for extra or discounted rates based on their deviation from the standard.
Substandard risk — Also known as impaired risk. A risk deemed undesirable due to medical condi tion or hazardous occupation requiring the use of a waiver, a special policy form, or a higher premium charge.
Suicide clause— If the policyholder dies by suicide within the first two years of the policy, then the insurance will not give beneficiaries the death benefit. If the death occurs after the two-year period, beneficiaries receive the death benefit. The suicide clause is separate and distinct from the "contestability period" defined above.
Survivorship life insurance — Also known as "second to die" or joint life insurance. Based on two people with an insurable interest (married couple or business partners) and doesn't pay until both people die. Typically used by high net worth individuals to lessen the estate tax burden on inheritances.
T
Term — Period of time for which an insurance policy is in effect
Term conversion rider — Also known as a "convertible" allows you to convert a term life policy into a permanent (whole) life insurance without additional evidence of insurability
Term life insurance— Life insurance payable only if death of the insured occurs within a specified time, such as 5, 10, 20, or 30 years, or before a specified age
Trust— An estate-planning tool that can be revocable (terms can be changed ) or irrevocable (once formalized no part can be changed). A trust gives the grantor control over funds and assets during their lifetime and after designating how funds are to be distributed. A trust can also be the beneficiary of a life insurance policy.
U
Underwriter — Person who identifies, examines, and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate
Underwriting — The process by which an insurance company examines risk and determines whether the insurer will accept the risk or not, classifies those accepted and determines the appropriate rate for coverage provided
Universal life insurance — A permanent life insurance policy with the flexibility to change your premium, death benefit, and cash value invested in the insurance company's portfolio.
V
Variable life insurance — A permanent life insurance policy with a death benefit and cash value that is in the stock market rather than your insurance company
Variable-universal life insurance — A permanent life insurance policy with the flexibility to change your premium, death benefit, and cash value invested in the stock market
W
Waiver of premium rider — If you are sick, hurt, or disabled, your premiums are waived. Typically used with permanent life insurance policies
Whole life insurance — A permanent life insurance policy guaranteeing the same premium for the life of the policy with a death benefit and cash value invested in the insurance company's portfolio
Ronda Lee is an associate editor for insurance at Personal Finance Insider covering life, auto, homeowners, and renters insurance for consumers. She is also a licensed attorney who practiced litigation and insurance defense.