Life Insurance Basics: Glossary of Common Life Insurance Terms

Life insurance can be a key component of financial planning, helping ensure your loved ones are financially supported in the event of your death. However, the complexity of life insurance terminology can often be overwhelming for those new to the process. In this glossary from the professionals at Acrisure, we help you understand common life insurance terms that may apply to your policy.

Glossary of Common Life Insurance Terms

This glossary explains some common life insurance terms to help you better understand how life insurance works. We've grouped terms by policy types, premiums, participants, benefits and payouts, policy features, and other related terms for your ease.

_{Note that the actual terms, conditions and definitions of a given policy may vary and the following is provided for informational purposes only. Always refer to your policy for details of coverage.}

Life Insurance Policy Type Terms

Group Life Insurance
Life insurance coverage offered to multiple individuals under a single contract, often provided by an employer as part of a benefits package. Group life insurance is typically term life insurance with basic or limited coverage amounts.

Term Life Insurance
The most common type of life insurance, term life insurance provides coverage for a determined period of time, such as 10, 20, or 30 years. If the insured dies during that term, the policy’s pre-determined death benefit will be paid to the beneficiaries. While it can be one of the most affordable life insurance options, it doesn’t offer the opportunity to build cash value. Once the term expires, coverage ends. Term life insurance can be suitable for temporary needs like providing for children until they become financially independent, for example.

Convertible Term Life Insurance
A type of term life insurance policy that gives the policyholder the option to convert it to a permanent life insurance policy within a specified period, without needing a new medical exam.

Permanent Life Insurance
Permanent life insurance is a type of life insurance policy that provides lifelong coverage, as long as premiums are paid. Unlike term life insurance, which covers a specified term, permanent life insurance can include a savings component, known as cash value, which can grow over time and be accessed by the policyholder under certain conditions. Common types of permanent life insurance include whole life, universal life, and variable life insurance.

Universal Life Insurance
Universal life insurance is a type of permanent life insurance coverage that features flexible premiums and adjustable death benefits within certain policy limits. It combines life insurance coverage with a savings element that can earn interest based on market interest rates, giving policyholders more control over how much they pay and save.

Variable Life Insurance
Variable life insurance is a type of permanent life insurance that allows the policyholder to invest the cash value in various separate accounts, similar to mutual funds. The death benefit and cash value can grow or shrink depending on investment performance, which means potential for growth but also risk of loss.

Whole Life Insurance
A type of permanent life insurance, whole life insurance covers the insured for their entire lifetime, as long as premiums are paid. It includes a cash value savings component that grows at a guaranteed rate and can be borrowed against.

Rider
A rider is an optional add-on to a life insurance policy that can provide additional benefits or coverage. Common riders include accidental death, accelerated death, waiver of premium, or children’s term coverage.

Life Insurance Premium Terms

Premium
The amount the policyholder pays, usually monthly or annually, to keep the life insurance policy active. Premiums are based on many different factors, including but not limited to: age, health, coverage amount, and type of policy.

Level Premium 
A premium that stays the same throughout the life of the policy or for a set term. This helps make budgeting predictable because the cost won’t increase with age or changing health.

Modal Premium 
Modal premium refers to the way premiums are structured and paid over time. Instead of paying an annual premium in one lump sum, policyholders have the option to pay at different intervals, such as monthly, quarterly, or semi-annually. These payment intervals are called "modes," hence the term "modal premium."

Life Insurance Policy Participant Terms

Insured 
The insured is the person whose life is covered by the policy. When the insured passes away, the death benefit determined by the policy is paid out to the named beneficiaries.

Policyholder 
The policyholder is the person or entity who owns the policy and is responsible for paying the premiums. The policyholder can be different from the insured (e.g., a parent owning a policy on a child).

Beneficiary
The beneficiary is the person, people, or organization designated to receive the death benefit determined by the policy when the insured dies. Beneficiaries can be individuals like spouses, children, relatives, and friends, trusts, or charitable organizations.

Contingent Beneficiary
A contingent beneficiary is the backup beneficiary who will receive the death benefit determined by the policy if the primary beneficiary has passed away or is otherwise unable to accept it.

Life Insurance Benefit & Payout Terms

Death Benefit 
A life insurance death benefit is the amount of money paid to the beneficiary or beneficiaries upon the death of the insured, determined by the policy. It is generally paid as a lump sum and is typically income tax-free.

Accidental Death Benefits
Accidental death benefits in life insurance help provide an additional payout to the beneficiary if the insured's death results directly from an accident. This coverage afforded under this rider typically covers unforeseen events like car accidents or falls, offering extra financial protection.

Accelerated Death Benefit 
An accelerated death benefit rider is a provision that allows the insured to receive a portion of the death benefit early if diagnosed with a terminal illness. This can help cover medical costs or other expenses.

Waiver of Premium Benefit
A Waiver of Premium Benefit in life insurance is a rider option that allows the policyholder to stop paying premiums if they become totally disabled, without losing coverage. This feature helps ensure that the life insurance policy remains in force during periods when the insured cannot work and generate income due to a severe disability.

Face Value
Face value refers to the original death benefit stated on the life insurance policy. This is the amount the insurer promises to pay, not including any additional amounts or deductions.

Cash Value 
Cash value is a savings feature of permanent life insurance policies that can build up over time. Policyholders can borrow against cash value, withdraw it, or use it to pay premiums (subject to policy guidelines and potential tax implications). Cash value is an integral part of permanent life insurance policies such as whole life, universal life, and variable life insurance.

Surrender Value 
Surrender value refers to the amount the policyholder will receive if they cancel a permanent life insurance policy before their death. It’s the cash value minus any surrender charges or loans.

Other Important Life Insurance Terms

Contestability Period 
The contestability period is a time frame (typically two years from the policy start date) during which an insurance company can investigate and deny claims due to misrepresentations or omissions on the application.

Dividend
Some permanent policies, like participating whole life insurance policies, may pay policyholders dividends if the insurance company has surplus profits. These can typically be taken as cash, used to reduce premiums, or used to buy more coverage.

Exclusions 
Exclusions are specific circumstances listed in a life insurance policy under which the insurer will not pay the death benefit.

Grace Period 
A grace period is a set time frame (typically 30 or 31 days) after a premium’s due date when a payment can still be made without the policy lapsing.

Illustration
In life insurance, an illustration refers to a detailed projection provided by the insurer that shows how the policy is expected to perform over time, including premiums, cash value growth, and death benefit amounts.

Insurable Interest
Life insurance policies require insurable interest at the time the policy is taken out. Insurable interest means that the policyholder must have a legitimate interest in the continued life of the insured, typically because they would suffer a financial loss or hardship if the insured were to pass away. This requirement helps prevent the misuse of insurance policies for speculative or unrelated financial gain.

Policy Loan 
A policy loan is a loan that the policyholder can take out against the cash value of a permanent life insurance policy. Interest is charged, and unpaid loans reduce the death benefit.

Reinstatement
Reinstatement is the process of restoring a lapsed policy to active status by paying missed premiums and meeting certain conditions, such as proof of insurability.

Suicide Clause
Many life insurance policies contain a suicide clause, which typically stipulates that if the insured commits suicide within a specified period, usually two years from the policy's start date, the insurer will not pay the full death benefit but instead may refund the premiums paid. This clause is in place to help prevent insurance fraud.

Underwriting 
Underwriting is the process by which an insurance company evaluates the risk of insuring a person. This process determines the premium amount and whether the application is approved or declined, Some policies offer simplified underwriting with minimal medical requirements, while other life insurance policies require a full medical examination.

In Conclusion

Understanding fundamental life insurance terms can empower you to make well-informed decisions and select the policy that best fits your financial needs and goals. Regularly reviewing your life insurance policy, updating beneficiaries, and consulting with a knowledgeable insurance professional can help ensure that your coverage provides the desired protection for your loved ones.

Acrisure is on your side with life insurance expertise. Contact us to learn more or request a term life insurance quote now.