Glossary of Life Insurance Terminology & Definitions

Not sure where to start when it comes to learning about and shopping for life insurance? Our glossary of the most common terms, phrases, and concepts will help you brush up on life insurance definitions in no time. When you're ready to take the next step, compare quotes for free or talk to a Policygenius expert.

An add-on on life insurance policies that pays a portion of the death benefit to insured persons who terminally ill.

This rider typically requires the insured to be diagnosed as terminally ill, provide medical records and physician’s statements, and usually has a fee added on to the monthly/annual premium to pay for this.

The amount paid varies, but is usually as high as 80% of the death benefit.

A policy add-on that will have the Insurance Carrier pay out an additional benefits — up to the full amount of the death benefit — if either the insured’s death is the result of an accident or loses a limb or digit because of an accident.

Unless an insured has a high-risk job or avocation, it’s usually not worth the extra cost, as it’s rarely paid out by insurance carriers.

Also called a mortality table. A table underwriters use that displays the probability a person will die at each age.

The tendency of those with higher risk lifestyles or dangerous professions to obtain life insurance more than those who are are lower risk.

Insurers usually try to reduce their risk in insuring a bad risk by having rigid underwriting guidelines.

A level term life policy that lasts for one year. Also called yearly renewable term, it guarantees coverage for one year, and can be renewed annually at a higher premium or converted to permanent life. Usually, this is purchased for temporary needs as a supplement to existing insurance.

If an underwriter decides it’s necessary to take a closer look at your health, either because of something you disclosed on the application or because of the results of your paramedical exam , then he or she will request a written summary of your medical history from your doctor or hospital. This document is called an APS, or “attending physician statement.”

You don’t pay for the APS, but it’s expensive and time consuming for the insurer, which is why an APS is only requested when the underwriter sees a need for it. An APS can slow down a life insurance application considerably because it may take your physician days to weeks to find the time to complete it, and it requires extra work on the part of the underwriter to go through it.

An APS might be requested during an application for life insurance or long-term disability insurance.

The APS is sent directly from your health care provider to the insurance underwriter. It is private health information protected by HIPAA.

An avocation would be a hobby or minor occupation, like skydiving, snowboarding or knitting.

Certain avocations are considered higher risk, and may result in a rate-up when applying for life insurance. That rate-up is typically determined by how often it’s done or how risky it is.

For example: people who scuba dive may have a rate-up if they typically exceed a certain depth, dive more often than typical vacation/holiday trips, or dive to overhead environments (caves, shipwrecks, etc.)

Avocations that may have a rate-up include, but are not limited to:

Motorsports/Racing
Hang Gliding
Piloting/Aviation
Rock Climbing
Scuba Diving
Sky Diving

The beneficiary is the recipient (or recipients) of your policy’s death benefit. This can be one person or organization, or several persons or organizations. You pick whom the death benefit goes to, and what percentage of it each receives.

For example: A policy’s death benefit will be issued to whomever is named as the recipient in the actual policy. i.e John Smith has a policy for $250,000 and passes away, his surviving spouse receives a death benefit from the policy of the face value of $250,000.

The cash surrender value (or just surrender value) is the amount of money you’ll receive if you cash in your permanent policy. It’s typically the current cash value of your policy minus any outstanding loans and interest fees, as well as any surrender or administrative fees listed in your contract. Typically the surrender value is between 50-80% of the policy’s actual cash value.

A policyholder can frequently get more cash back by selling the unwanted policy to a life settlement company instead of surrendering it to the insurer.

A type of life insurance policy that pays out upon the policyholder’s death, and also accumulates value during the policyholder’s lifetime.

A policy add-on that provides a death benefit if a policyholder’s child(ren) passes away.

The deliberate hiding of or failure to disclose “material” information known to be relevant in the underwriting of an insurance policy.

For example, John tells his agent during the application process that he has never smoked when actually he did five years ago and has since quit. If the truth comes to light after the policy is in force, depending on how much time has passed the insurer has the right to cancel or modify the policy.

A policy add-on that pays a lump sum if the insured is diagnosed with a critical illness specified in the policy. Typical illnesses include heart attack, cancer, stroke, kidney failure, coma and others. This can also be purchased as a standalone policy from non-life insurance carriers.

The death benefit is how much the life insurance policy pays to the beneficiary upon the policyholder’s death. This amount is considered the face value of the policy. It is usually untaxed and paid to beneficiaries in a single lump sum.

Depending on the life insurance policy you purchased, the death benefit can be fixed or variable. If you purchase a term life policy with a $250,000 face value, your death benefit is $250,000. If you purchase a variable life insurance policy with a $250,000 face value, your death benefit could be lower or higher based on how the investments your policy is tied to perform over time.

A term life policy with a death benefit that decreases over time with a level premium. Typically, this is sold as “mortgage insurance” since most buyers use it to cover a depreciating asset or a diminishing loan. This is not the same as private mortgage insurance one may be required to buy as part of a home loan.

A policy add-on that provides a monthly stipend to replace your income if you become disabled and unable to work.

Can also be purchased as a standalone long-term disability policy.

The date a policy is considered to be in force. A policy with a May 1, 2015, effective date means that if the insured passes away on May 1, 2015, or afterward, the policy will pay the death benefit to any listed beneficiaries.

The time period between an injury and the receipt of benefit payments.

Provisions in an insurance policy that clarify coverage and explain the circumstances in which benefits will not be paid.

The amount the policy is worth.

For example: A 20-year term life policy has a face value of $250,000.

A uniform mandatory provision that gives the insured a period of time, based on the payment mode, to pay the required premium. During the grace period, the policy is still in force.

For example: Policyholders can pay the premium 31 days after the initial due date.

Insurance products people can enroll in by virtue of working for an employer, being a member of a union or part of an organization. If you get medical, dental and/or vision insurance through your union or employer, you have group coverage.

An industry term meaning applicants cannot be turned down because of medical issues when applying.

A condition that increases the likelihood of a loss.

A term life policy that increases the death benefit each year during the term. Concurrently, as the death benefit increases, so does the premium. If kept long enough, the premium on this policy will increase faster than the death benefit. Usually, this is sold as a supplement to a permanent life insurance policy.

This is the written contract between the insurance carrier and the policyholder. The insurance policy details who is covered, for how long (if applicable) and under what conditions the death benefit will be paid out.

The person for whom the life insurance policy is covering. If the insured dies, this will cause the death benefit to be paid out to the designated beneficiary (or beneficiaries). Typically, this will be the policyholder, but is not always the case (i.e. one spouse is the policyholder, but the other spouse is the person being insured).

The company providing the insurance. This is whom policyholders pay premiums to, and the carrier, in turn, pays the death benefit to the beneficiary.

For example: AIG.

Added feature where the policyholder cannot make changes to the life insurance contract without the beneficiary’s consent.

When a policy is terminated due to a non-payment of premiums.

A term life policy guaranteed to have the premium remain the same for the duration of the contract. This is what most people refer to as term life. Purchased for a set number of years (5, 10, 30 years, for example), the premium and the death benefit remains the same (level) until the end of the term. Many of these policies can be converted to a permanent policy at the end of the term, or can be canceled at any time.

A policy add-on that takes money out of your death benefit in order to pay for long term care (LTC) — nursing homes, private nurses, etc. It’s not uncommon to have this and the accelerated death benefit (ADB) considered one item on policies, but the qualifications for each are different: ADB requires a terminal illness diagnosis before being triggered; the LTC rider are triggered by chronic illnesses that leave you unable to take care of yourself.

LTC coverage can also be purchased as a standalone product from some companies, but can be more expensive and harder to qualify for.

A life insurance policy that does not participate in any dividends issued by the insurer.

The period each year where employees can make changes to the benefits purchased from the employer. During this time, employees can enroll or waive health insurance, life insurance, add or remove dependents — without providing proof of other coverage.

For example: ABC company has designated March 1st as the last day for open enrollment encouraged to sign up for a group policy.

A paramedical exam is a carrier-required short health exam performed at the applicant’s convenience.

It is at no charge to the applicant, and the technician will perform it at your home or place of work, if convenient for you. During the exam, your height, weight, blood pressure and pulse will be measured. You will also be asked to provide a blood sample and urine sample. In some cases, an EKG and saliva sample will be taken as well.

Here is more information on what to expect from your paramedical exam.

A category of life insurance products that are in effect for the life of the insured. The products in this category allow for a cash value to be built up over the life of the policy. That cash value can be borrowed against or paid to the policyholder in exchange for surrendering the policy.

Whole (ordinary) life, universal life, variable life and variable-universal life are permanent life insurance products. Because these do not cancel until the policy is surrendered, terminated for non-payment or the insured person dies, these policies are more expensive when compared to term life insurance.

The person who owns the life insurance policy. Only a policyholder can make changes to a life insurance contract.

The cost of purchasing the policy. This can be paid monthly, quarterly, semi-annually (every six months) or annually (once per year).

Depending on the policy type purchased, premiums can be: level (stay the same for the life of the policy); attained-age (rate changes after each birthday); community-rated (the same for everyone in a particular area); age-banded (the same for everyone within the same age group or range), or various other methods.

Primary beneficiary is the person or organization (or persons or organizations, if you want to divide it up) that the insurance carrier will pay first. Contingent beneficiary is the person(s) or organization(s) the insurance carrier will pay if your primary beneficiary is deceased or no longer operating (if an organization).

Make sure your primary and contingent beneficiaries know about your life insurance policy so they are prepared to take action should a problem arise or payout is necessary. For the same reason it’s also a good idea to provide them with access to the contract.

A type of insurance required by mortgage lenders when buying a home if the home buyer put down less than 20% of the home’s value. The charges for this are included with the mortgage payment, and can be cancelled once the homebuyer has paid off the equivalent of 22% of the home’s value (down payment plus principal).

Decreasing term life is referred to as mortgage insurance, but is not the same as private mortgage insurance.

Also called “class” or “rate categories.”

The category, based on health status, that the underwriters at a given insurer designate to an applicant to determine the premium.

A policy add-on that returns the premiums paid if the insured outlives the term of the policy.

For example: If a 10-year term life policy is purchased for $50 per month, and the insured outlives that time period, with this rider, the policyholder would have up to $6000 in premium returned. The cost of this add-on is not returned to the policyholder.

Additional options that can be placed on an insurance policy. Typically, these have the potential of enhancing coverage in certain circumstances. However, in most circumstances, they may not be worth the extra cost.

A permanent life insurance policy designed to cover immediate expenses related to an insured’s death — funeral, burial, medical bills, etc. These policies are typically guaranteed issue, never expire and are level premium.

The process of paying out a claim on a life insurance policy or distributing assets in an annuity.

An applicant for insurance who is and has average life expectancy.

An applicant who is insurable, but who presents additional risk to an insurer due to below average life expectancy.

The act of giving the policy back to the insurance carrier. Surrendering a permanent life insurance policy results in the carrier paying the policyholder any cash value in the policy.

The primary purpose of life insurance — to provide income to the decedent’s surviving family members.

This is the inherent reason one purchases life insurance.

A permanent life policy designed to cover two insureds that pays a death benefit when the second insured dies. This is often purchased to protect heirs from paying estate taxes. Also known as “second-to-die insurance.” The underwriting is more lenient than for individual policies, meaning it can sometimes be used by couples to buy life insurance when one half of the couple would otherwise be uninsurable.

The period of time a policy is in effect.

For example, a policy could provide coverage of $250,000 for a 15-year term.

A policy add-on that allows policyholders to convert a term life policy to a permanent life policy at or near the end of the term policy’s life.

The day the coverage on the policy ends. A 10-year term policy would no longer be in effect 10 years and one day from the effective date.

A category of life insurance that is in effect for a fixed amount of time. If the insured dies before the term ends, the insurance carrier agrees to pay any beneficiaries a lump sum of money. This insurance category has no cash value, but can have a significantly higher face value for lower premiums than an equivalent permanent life insurance policy.

One of the uniform mandatory provisions, it requires ongoing claims to be paid no less frequently than once a month.

Underwriting is the process by which an insurer determines the risk of insuring you.

Based on the applicant’s health status and history, avocations, family health history and paramedical exam results, an underwriter will evaluate the data, compare to the actuarial tables, and assign an underwriting class. This will determine how much the policy will cost the applicant, if s/he accepts the underwriter’s offer of coverage.

A permanent life insurance policy where the policyholder controls the premium and death benefit amounts. The cash value earns interest, can be used to pay the policy premiums, but can lose value.

A permanent life insurance policy that has a guaranteed death benefit and cash value can be invested. The death benefit can increase, but will never fall below the face value; the cash value will fluctuate based on investment performance.

A permanent life insurance policy where the policyholder controls the premium and death benefit amounts. Policyholders can invest the cash value into investment portfolios, and it and the death benefit will grow or shrink based on how well the investments do.

The time between the filing of an insurance claim and the payments made on the claim.

Example: Typically, the longer the waiting period on an insurance claim, the cheaper the policy will be for the holder.

A policy add-on that will waive the insurance policy premium if the insured is disabled for six months. Once the disability ends, premium payments resume. What is considered a disability is determined by each insurance carrier.

A category of life insurance that stays in effect as long as the premiums are paid. Whole life insurance comes with an investment-like cash value component that grows or shrinks over time. This is a type of permanent life insurance.

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