Life Insurance - Definition of Terms
If you’re confused, don’t worry. Everyone has to start somewhere. This glossary should help you wade through all of the terms in the life insurance industry.
Accumulated Premiums - the dollar amount of all the premiums paid to date from the policy owner to the life insurance company.
Annual Premium - payments made from the policy owner to the life insurance company made once per year. Generally, this payment method is less expense than a Monthly Premium payment schedule because there are less transaction costs.
Beneficiary - an entity or individual who receives a death benefit from a life insurance company after the terms of the policy have been met.
Cash Surrender Value - the amount of money the policy owner can receive if the policy is cancelled. The policy holder surrenders the right to receive a future death benefit in exchange for immediate cash.
Death Benefit- the dollar amount a beneficiary receives when all conditions of a life insurance policy are fulfilled.
Dividend - a payment made to the account of the policy owner when the life insurance company experiences a profit and elects to share a portion of the profit with its customers.
Face Value - the amount a policy is originally worth to the beneficiary when the insured dies or when the policy matures. However, the actual benefit can be more or less than the initial face value.
Insurability - the level at which a person can be insured. Factors include physical health, family health history, recreational activities, work environment, and travel activities.
Insurance Policy - a legally binding contract entered into by a certified life insurance company and a policy holder. It is very important to understand the terms of the contract and consult with your certified accountant, attorney, and life insurance agent for advice because every situation is unique.
Insured - the entity or individual who is covered in an insurance policy. If this person were to pass on and all terms of the life insurance contract were fulfilled, the designated beneficiaries would receive the death benefit.
Maturity- the time at which the cash benefit is paid to the beneficiary(ies). This happens when the insured passes on or reaches a specified age (usually 100).
Monthly Premium - payments made from the customer to the life insurance company made once every month. Generally, this payment method is more expense than an Annual Premium payment schedule because there are more transaction costs.
Paid-Up - a policy can be paid off before maturity. Most whole life insurance policies are “paid-up” or calculated to be funded by age 100. You can elect to buy Paid-Up insurance at 90 or 70 or any other age you wish.
Policy Owner- the individual or entity that has entered into a contractual agreement with a life insurance company to pay premiums in exchange for cash values and/or a death benefit. Note that the policy owner can be the same person as the insured but doesn’t necessarily have to be the same person. For example, a grandparent can be the owner of a policy where the grandchild is insured.
Premium- a payment made from the policy owner to the life insurance company. It is one of but not the only form of revenue for the life insurance company. The amount of the premium depends on the health and lifestyle of the insured, the amount of death benefit, length of contract, and any additional riders.
Reinsurance Company - an organization that insures a normal insurance comapany against financial loss.
Rider- an addendum or additional clause to an insurance contract. Think of a rider as an additional condition “riding” on top of (or in addition to) a policy. There can be many types of riders with various options. Usually, riders provide a benefit to the policy owner. Therefore, they usually cause the amount of the premium to be higher.
Single Premium - one payment pays for the entire policy.
Underwriting - The process an insurance company goes through to decide if a person can be insured and at what price.
Waiver of Premium Rider- the insurance company would pay the premiums for a policy owner if a specified event were to occur. This waiver of premium is an advantage to the policy owner, so there is usually a small additional fee added to the premium. For example, assume that Sally does her homework and discovers that insurance premiums with no riders cost $200 per month and premiums with a 2-year, disability waiver of premium rider would cost her $209 per month. The rider states that if she were to become disabled from working at any time within 2 years, the premiums would be paid by the insurance company. Sally decides to include the rider in her policy. 7 months later, Sally becomes disabled. The insurance company will now pay the remaining premiums according to the terms of the contract. Basically, it’s insurance on your insurance policy. You insure yourself against the risk of not being able to pay the premiums of the insurance policy.
Tags: Life Insurance Glossary