Life Insurance Terms You Should Know
Just like with lawyers, members of the insurance industry use unfamiliar terms when they discuss the various products they represent. Not because they’re smarter than anyone else, it’s just the nature of the industry. Certainly, anytime you’re speaking with an agent, you can interrupt and ask what they’re talking about; but when you’re reading about insurance, there is typically no glossary at the bottom of the article or web page that explains the unusual life insurance terms. For this reason, we’ve listed the most common terms and their meaning in layman terms (for a more complete list, visit our glossary).
When You’re Shopping for Life Insurance
Term Insurance
Term life insurance refers to insurance that is purchased for a period of years (the term) which are typically 5, 10, 20, and 30 years. There is also annually renewable term which is a one-year policy. Since the premium remains the same throughout the policy term, the rates for a longer term are higher than rates for a shorter term because of the higher risk to the insurance company.
When term policies expire, most companies will offer a renewal for an annually renewable term, but the pricing will be based on your new age. Many insurers will also have a conversion privilege that allows the policyholder to convert the term policy to a permanent policy such as Universal Life or Whole Life without you having to prove you are still healthy. You will, however, pay the rate based on the new type of policy based on your new age.
Term insurance quotes can easily be done online as many independent agents have “quote engines” on their websites. It’s important to note that an online quote must be confirmed with an agent because there are underwriting questions that must be asked and answered before the application can be submitted.
Whole Life Insurance
Whole life is permanent insurance that provides coverage throughout your lifetime. These policies accumulate cash value because the periodic premium you pay is actually more than the cost of insurance during the early years and less than the cost of insurance in the latter years. The insurance company also pays a small amount of interest on the cash value account each month.
Whole life insurance is most attractive because the death benefit is guaranteed for your lifetime as long as you pay your periodic premium, the premium does not change, and you can borrow the cash that accumulates in the policy.
Universal Life Insurance (UL)
Universal life insurance is a type of flexible permanent life insurance that offers lower cost insurance protection (like term) combined with a savings element (like whole life). The money in the savings account is invested by the insurer and credited to the account to allow for building the cash value of the policy.
The primary difference between UL and term or whole life insurance is its flexibility. With a UL policy, the premiums and face amount can be changed to accommodate life changes of the policyholder. Also with a UL policy, there is a minimum interest rate established by the insurer, but if the insurance company’s portfolio outperforms the minimum interest rate for the policy, the insurer will apply the excess earnings to the cash value of the policy. UL also allows access to the cash value through loans and partial surrender.
Death Benefit
The death benefit is the amount the insurer agrees to pay your beneficiary in the event of your death.
When You Apply for an Insurance Policy
When You Apply for an Insurance PolicyPeriodic Premium
This is the amount you pay to the insurer in return for the insurance policy. Typical premium periods are monthly, quarterly, semi-annually, or annually. Your premium will be based on many factors such as your age, your health, tobacco use, the amount of coverage, and your weight and height.
Underwriting
This is a process your insurer will require to determine the rate class you will be assigned. The process typically includes an application containing questions about your health, a medical exam, a blood and urine analysis, and reports from your doctors and any medical facilities you listed on the application.
Table Rating
A table rating is like a rate surcharge used by the insurer when the applicant does not qualify for standard insurance rates.
MIB (Medical Information Bureau)
Most insurers check the MIB database while going through the underwriting process. This database does not contain your medical records, it does, however, provide member insurance companies with information regarding health conditions and lifestyle information.
ScriptCheck
ScriptCheck is a for-profit organization that maintains a database of individual’s prescription records that only a life or health insurer can access.
When You’ve Been Approved for Coverage
When You’ve Been Approved for CoverageBeneficiary
Your beneficiary is the person(s) or organization(s) that you assign to receive the death benefit in your policy when you die.
Contingent Beneficiary
Your contingent beneficiary (alternate) receives the death benefit when your beneficiary does not survive your death. For example, you might name your spouse as beneficiary and then your children as contingent beneficiaries.
Cash Value
A savings account found in Whole Life and Universal Life policies that earn interest and is available to the policyholder through policy loans or surrender.
Riders
Riders are options that are available to purchase and add to your life insurance. Since they are an extension of coverage, most all riders require additional premium.
Policy Loan
A policy loan is when a policyholder borrows from their insurer and uses the cash value in their policy as collateral. Policy loans may or may not have to be repaid, but in all cases, the unpaid balance of the loan will be deducted from the death benefit if you die with an unpaid balance.
Surrender
When a policyholder surrenders a life insurance policy, they are exchanging all their rights under the policy for the accumulated cash value, minus any surrender charges. Only a whole life or universal life policy can be surrendered.
Life Settlement
A life settlement occurs when an insured sells their life insurance policy to an individual or company for cash. The new owner keeps the policy in force and continues to pay the premiums. The purchaser receives a return on investment when the insured dies. Almost all types of policies are eligible for a life settlement. Typically, to qualify for a life settlement, you must be at least 65 years old with a life expectancy of 15 years or less, and the death benefit must be at least $100,000.
I believe that when people shop for insurance (or anything else, for that matter) on the Internet, they are looking for a simple, non-intrusive, non-pressure method of doing so.
I strive to treat my prospective clients with the utmost respect and I believe an educated prospect can make the right decision without sales pressure.
Being independent, I represent many highly-rated insurance companies and, because I am not beholden to any one insurance company, my focus is to find the right company and policy for each individual client.
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