Life insurance is one of the best ways to ensure your loved ones are financially secure when you’re no longer around to provide for them. Despite its importance for a bright financial future, life insurance still has a reputation for being a bit confusing.
From annuities to underwriting, life insurance terminology can pose a barrier to fully understanding a policy, which isn’t an ideal scenario for either the customer or the company providing the policy. Getting to know life insurance terms is a win for everyone involved and helps to demystify the process as a whole.
While specific policies differ from company to company, there are some standard terms that are used across the life insurance landscape. Keep the following glossary handy any time you’re starting, updating or simply reviewing your life insurance policy.
Annuity
An annuity is a contract that provides you with regular income for life (or a set time period) that’s paid out by your insurance policy.
Beneficiary
A beneficiary is the person (or people) you designate to receive compensation if something happens to you.
Cash Surrender Value
Cash surrender value is the amount of money you would get if you canceled your policy before it pays out – typically minus fees and loans.
Direct Response
Direct response is a type of insurance with no middleman. It’s sold straight to you via mail, online or in-person.
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A dividend is a little bonus you may get back if your life insurance company overcharged for your policy.
Face Amount
Think of face amount like face value: It’s the payment amount on your policy that doesn’t include any extras.
Insurable Interest
Insurable interest is the reason for insuring someone, like love, family or financial ties.
Insurer vs. Insured
The insurer is the company that provides the policy, and the insured is you (or the person covered).
Lapse
When a policy becomes inactive because premium payments haven’t been made.
Life Insurance
A policy that acts as a financial safety net for your loved ones if anything happens to you. It’s like saying, “I got your back – even if I’m not around.”
Non-forfeiture
Non-forfeiture means that if you stop paying your premiums, you won’t lose everything, and you can instead choose options like taking cash or reduced coverage.
Participating and Non-participating Policies
A participating policy type may offer a piece of the company’s profits as a dividend. A non-participating policy does not.
Policy Proceeds
Policy proceeds are the funds your policy pays out when it matures, or someone claims it (i.e. your beneficiary).
Premium
The regular payment that’s made to keep your policy active. Sort of like a gym membership, but instead of working out, it’s ensuring your loved ones are financially healthy.
Rating
A rating is an extra charge added to your premium if you are considered a higher-than-average risk.
Rider
Just like how celebrities can add expensive coconut water to their dressing room riders, a life insurance rider is a little add-on to customize your policy (like extra coverage or specific inclusions).
Standard Risk
The classification of a person applying for life insurance coverage that falls under the average standards on which premium rates are based.
Supplementary Contract
A separate agreement for how the policy payout will be managed (installments vs. lump sum, etc.).
Underwriting
The process of underwriting is like choosing your fantasy team. Both use “stats” (in this case, medical history and lifestyle habits) to evaluate risk and determine the best outcome (cost and type of coverage).
Learn more about life insurance through AAA.
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