A Quick Guide to Insurance Terms
October 25, 2021
Death Benefit. Rider. Surrender Charge. Huh?
Are you thinking about buying life insurance but getting tripped up by the jargon? You’ve probably heard some of the terms before but perhaps have no clear idea of what they mean. Fear not. This glossary of life insurance terms offers definitions that will help you navigate the often complicated world of insurance. Ahead, we list the terms (in alphabetical order) that you might come across while shopping. You can keep this list handy, and find terms easily when you need them.
Account Value: Certain types of permanent life insurance (see below) include an account value. The funds in the account value equal your payments minus the fees and expenses for the policy, and minus any withdrawals you’ve taken (including any charges or taxes related to those withdrawals). In short, it is the gross value that has built up inside the policy.
These funds can potentially grow tax-deferred. Depending on the policy, you can make extra payments if you’d like, which can help to increase the account value. You can access these funds (through a withdrawal or a loan) and use them as you see fit. Note that loans and interest (if not paid back) and withdrawals will result in a lower death benefit and may lead to tax consequences.
Beneficiary: The person(s) or entity (a trust, for example) that receives the life insurance payout when the insured dies. You designate your beneficiaries when you purchase the policy and can add to or change those designations throughout the life of the policy (unless you make the beneficiaries irrevocable, though this is rare). For instance, an unmarried person may name their parents as beneficiaries. If they marry, they can change the beneficiary in their policy, if they would like.
Cash Value: The net value of the policy that you will receive if you surrender (give up) the policy. In short, it is the account value less surrender charges imposed if you give up the policy. For that reason, it is sometimes referred to as the Surrender Value. Your premiums over time increase the cash value, as does interest and earnings credited. Contract charges and withdrawals, on the other hand, will reduce the cash value amount.
Death Benefit: The amount that is paid to the beneficiaries upon proof of your death. As mentioned previously, any loans and interest (if not paid back) and withdrawals will result in a lower death benefit and may lead to tax consequences.
Face Amount: The amount of coverage purchased. It’s called the face amount because in the past it was usually stated on the first, or “face,” page of the insurance policy (these days, it’s usually shown on a subsequent page in the policy).
Group Life: Life insurance that is provided by employers or associations as a benefit or perk for their employees or members. People often automatically qualify for a minimum level of coverage. Sometimes group life insurance plans offer a conversion option available to employees or members who are insured under the employer’s or association’s plan. The converted policy rates may be more expensive than an individual policy you could buy on your own if you are healthy.
Individual Life: Life insurance that is purchased directly by you and owned by you rather than by an employer or association. Individual life insurance usually provides coverage on the life of one person. (Some “joint” policies–often called “last to die” policies–may insure two people such as a husband and wife, but such policies are uncommon these days.)
Insured: The person whose life is covered by the life insurance policy. The insured may also be (but is not necessarily) the policyholder (see below).
Permanent Life Insurance: A type of life insurance that provides protection for your lifetime (but usually has a specified maturity date at which there is no longer a life insurance benefit provided), as long as payments are made as required by the policy. There are two main types of permanent life insurance: whole life and universal life. Permanent policies are where you might see the terms “cash value” and “account value.”
Policyowner: Sometimes called a policyholder. The policyowner is the person who applies for, and owns the life insurance policy. They can conduct transactions for the policy such as changing beneficiaries and taking cash withdrawals. Policies will have a policyholder, an insured, and a beneficiary. It is common for the policyholder and insured to be the same person, but they aren’t always. For example, a woman who takes out a policy on her own life would be the policyholder and the insured. A policyholder may also buy a policy that covers the life of someone else (a parent, spouse, or child, for example), who is the insured. Only the policyholder can make changes or other decisions about the policy, unless there is someone legally authorized to act for the policyholder (such as the attorney-in-fact named in a power of attorney).
Premium: The payment you make to keep the policy active. Depending on the terms of the policy, premiums may be scheduled—due monthly, quarterly, semi-annually, or yearly—or unscheduled (you make them when you choose, so long as they are sufficient to keep the policy active). Certain types of permanent life insurance policies allow you to contribute more than the required minimum payments, which may help to increase the cash value and/or death benefit.
Rider: An additional feature that can be added to your policy to provide additional benefits, usually for an increase in your premium. There are numerous types of riders available today to meet different needs. One example would be a rider that can provide payment of some or all of the death benefit to you while you’re living should you become disabled or develop a serious illness. Another is a rider that waives the premium in specified situations where you are not able to make your payment.
Surrender Charge: A fee that is deducted from the cash value (see above) if you cancel the policy during the surrender charge period. The surrender charge is usually imposed for only a set period of time (usually the first 10 to 12 years) after you first buy the policy.
Term Life Insurance: A type of life insurance that provides protection for a specified number of years. Term life insurance is usually less expensive than permanent life insurance, but also usually does not offer as many features.
Phew. That’s a lot of terms to learn. But they will be a big help when you buy life insurance or make changes to an existing policy. Don’t worry if you can’t recall what all of them mean. That’s why this glossary is here—so you can check back whenever you need to jog your memory.
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