Life insurance terminology & definitions

Life insurance terminology doesn't have to be confusing. Here are definitions of the most common terms and phrases you'll find in a policy.

Nupur Gambhir

Nupur Gambhir

Published December 27, 2019

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.


A

Accelerated death benefit rider

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An add-on to a life insurance policy that pays out a portion of the death benefit while you are still alive if you are diagnosed with a terminal illness. An accelerated death benefit rider is paid out under specific circumstances — typically when death is imminent.

Accidental death and dismemberment rider

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A policy add-on that pays out additional compensation — up to the full amount of the death benefit — if either the insured’s death is the result of an accident or he or she loses a limb because of an accident.

Unless the insured individual has a high-risk job or avocation, it’s usually not worth the extra cost, as the accidental death and dismemberment rider is rarely paid out by insurance carriers because of restrictions on the rider.

Actuarial table

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Also called a mortality table, an actuarial table is used by underwriters to determine the probability that a person will die at each age. The probability of death determines how risky it is to insure someone and determines the cost of life insurance premiums.

Adverse Selection

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The tendency of those with higher risk lifestyles or dangerous professions to obtain life insurance more than those who are lower risk. Insurers usually try to reduce their risk in insuring high-risk individuals by having rigid underwriting guidelines in place.

Annual renewable term life insurance

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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 a permanent life insurance policy. Usually, this is purchased as a supplement to existing insurance for temporary needs.

Attending Physician Statement (APS)

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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 you will need to submit a written summary of your medical history from your doctor or hospital. This document is called an APS, or “attending physician statement.”

Avocation

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An avocation is a hobby or minor occupation, like skydiving, scuba diving, or snowboarding.

Certain avocations are considered a higher risk and may result in higher rates when applying for life insurance. How much more you spend on life insurance is typically determined by how often you participate in the activity or how risky it is.

B

Beneficiary

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A beneficiary is the recipient of a life insurance policy’s death benefit. This can be one person, several people, or an organization, as determined by the life insurance policyholder.

C

Cash surrender value

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The cash surrender value is the amount of money you 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.

Cash value life insurance

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A component of a permanent life insurance policy that works like an investment or savings account. The cash value of the policy accumulates over the policyholder’s lifetime and can be withdrawn at any time or paid out upon the policyholder’s death.

Child protection rider

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A policy add-on that provides a death benefit if a policyholder’s child passes away. The child protection rider can cover the funeral of the child or time taken off work to grieve.

Concealment

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The deliberate hiding of or failure to disclose information that is relevant in the underwriting of an insurance policy.

Contingent beneficiary

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The person you designate to receive the death benefit if your primary life insurance beneficiary is unable to collect the money. Without a contingent beneficiary in place, a court will decide what happens with the life insurance death benefit if the primary beneficiary is unable to claim the death benefit.

Critical illness rider

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A policy add-on that pays a lump sum to the insured if he or she is diagnosed with a critical illness. Typical illnesses include heart attack, cancer, stroke, kidney failure, or a coma.

D

Death benefit

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An untaxed lump sum that the life insurance policy pays to the beneficiary upon the policyholder’s death. The death benefit amount is considered the face value of the policy.

Decreasing term life insurance

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A term life policy with a death benefit that decreases over time while the premium stays the same. Typically, this is sold as “mortgage insurance” because most buyers use it to cover a depreciating asset or a diminishing loan.

Disability income rider

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A policy add-on that provides a monthly stipend to replace part of your income if you become disabled and are unable to work. Its payout is usually too low to fully replace income, making disability insurance a better option for most people.

E

Effective date

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The date a policy is considered to be in force, or active. A policy with the effective date of February 1, 2021, means that if the insured passes away on or after that date, the policy will pay out the death benefit to any listed beneficiaries.

Exclusions

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Provisions in an insurance policy that clarify coverage and explain under which circumstances the benefits will not be paid out to the listed beneficiaries. Exclusions can be lying or omitting information during the contestability period, death by suicide, or dying while participating in illegal activity.

F

Face value

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The amount the policy is worth and what is paid out to beneficiaries upon the policy holder’s death. The face value is also known as the policy’s death benefit.

Final expense life insurance

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A permanent life insurance policy designed to cover immediate expenses related to the policyholder’s death, such as the cost of the funeral or medical bills. Final expense life insurance policies are typically guaranteed issue, never expire, and are level premium.

G

Grace period

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A mandatory provision that gives the policyholder a period of time to pay the required premium. During the grace period, the policy remains in force even if you have not made your premium payment.

Group coverage

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Life insurance coverage offered by an employer, union, or organization. It is often easier to qualify for than an individual life insurance policy but doesn’t provide the amount of coverage most people need. Group coverage is best utilized as supplemental life insurance coverage.

Guaranteed issue

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A type of life insurance that the insurer must issue if you can afford to pay the premiums. Applications for guaranteed issue policies cannot be rejected based on medical history or risky hobbies that might normally warrant a rejection from a life insurance application.

H

Hazard

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A condition that increases the likelihood of a loss.

I

Insurance policy

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The written contract between the insurance carrier and the policyholder. The insurance policy details who is covered, the term length of the policy, and under what conditions the death benefit will be paid out to the policy’s beneficiaries.

Insured

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The policyholder of a life insurance policy. If the insured individual dies, the death benefit is paid out to the designated beneficiaries.

Insurer

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The company providing life insurance to the insured. This is whom policyholders pay premiums to, and the insurer, in turn, pays the death benefit to the policy’s beneficiaries when the insured individual dies.

Irrevocable

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A feature on the life insurance policy where the policyholder cannot make changes to the life insurance contract or remove the beneficiary from the policy without the beneficiary’s consent.

L

Lapsed

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When a policy is terminated due to missed premium payments.

Level term life insurance

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Another term for a term life insurance policy, a level term life policy is where the premiums and death benefit remain the same for the duration of the contract.

Life insurance classification

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A determination of your risk as a life insurance candidate based on your health, family history, and avocations. The better your life insurance classification, the lower your premiums will be. There are four classifications: preferred plus, preferred, standard plus, and standard.

Long-term care rider

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A policy add-on that withdraws money from your death benefit to pay for long term care such as a nursing home or private nurse. A long-term care rider can be utilized in instances of chronic illness where you are unable to take care of yourself.

N

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A life insurance policy that does not pay out any dividends to the policyholder. A term life insurance policy, which does not have any cash value, is a non-participating life insurance policy.

O

Open enrollment

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The period each year where employees can make changes to their employer-sponsored benefits. During the open enrollment period, employees can enroll in or waive insurance policies or adjust their dependents.

P

Paramedical exam

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A paramedical exam is a health exam requested by the carrier to evaluate a life insurance applicant’s health and what health classification he or she falls into. The medical exam is performed at no charge to the applicant and can be done at a medical center or at home.

Permanent life insurance

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A life insurance policy that is active for the entirety of the policyholder’s life. Permanent life insurance policies offer a cash value component that makes them more expensive than term policies and is usually only a good option for people with particular circumstances.

Policyholder

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The owner of a life insurance policy. Only the policyholder can make changes to a life insurance contract.

Premium

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The cost of a life insurance policy. How much you spend on life insurance premiums is dependent on multiple factors, such as family history and your health. The premium payments can be paid monthly, quarterly, semi-annually or annually.

Primary beneficiary

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The person you designate to receive the life insurance death benefit when you die. If you have multiple beneficiaries, this person is the first to receive the life insurance payout.

Private mortgage insurance

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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.

R

Rating

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The health classification an individual receives that determines how much he or she pays for life insurance premiums.

Return of premium rider

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A policy add-on that returns the premiums paid by the policyholder if he or she outlives the term of the policy. Adding a return of premium rider can increase the cost of your premiums by around 30%.

Riders

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Add-ons to a life insurance policy that create more robust coverage, sometimes at an extra cost. Riders that come at no additional charge can be great supplements to a life insurance policy, while some riders that increase the cost of your premiums may not be necessary. A Policygenius agent can help you determine if a specific rider is a worthwhile consideration.

S

Settlement

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

Standard risk

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An applicant for life insurance who has an average life expectancy.

Substandard risk

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An applicant who doesn’t fall into the four life insurance classifications. An individual of substandard risk is insurable but presents additional risk to the insurer due to below-average life expectancy because of health or a smoking habit. A substandard risk rating means higher than normal premiums.

Surrender

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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.

Survivor protection

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The primary reason that most people buy life insurance, survivor protection is a financial safety net for the policyholder’s surviving family members.

Survivorship life insurance

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A permanent life insurance policy designed to cover a married couple. Survivorship life insurance pays out the death benefit after both policyholders have passed away and is often purchased to protect heirs from paying estate taxes. It is also referred to as “second-to-die insurance.”

T

Term

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The period of time a policy is in effect.

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

Term conversion rider

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An add-on included in most policies that allows for the conversion of a term life policy to a permanent life policy at the end of the policy’s term. A term conversion rider enables policyholders to retain life insurance coverage without going through additional underwriting.

Term date

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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.

Term life insurance

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A type of life insurance that is in effect for a set number of years, usually anywhere between five to 30 years. Term life insurance is a basic policy with no additional components, such as a cash value, but it is generally the best life insurance policy option for most people due to its lower cost.

Time payment of claims

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A provision that requires ongoing claims to be paid no less frequently than once a month.

Trust

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A legal entity where you can place your assets to be used by your beneficiaries. A trust ensures that the death benefit of your life insurance policy goes to your intended beneficiaries.

U

Underwriter

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The individual that works on behalf of the life insurance company to evaluate your application and issue you a life insurance classification. The underwriter uses your risk of mortality, determined during the underwriting process, to decide how much you pay for your life insurance premiums.

Underwriting

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The process by which an insurer determines the risk of insuring a life insurance applicant. The underwriting process evaluates the applicant’s health, medical history, avocations, family health history, and paramedical exam results.

Universal life insurance

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A type of permanent life insurance where the policyholder can adjust the premiums if his or her financial situation changes. Universal life insurance policies have a cash value that can earn interest and be used to pay the policy premiums.

V

Variable life insurance

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A type of whole life insurance that has a cash value that can build savings over time. Variable life insurance policies tend to have high premiums and are a risky investment vehicle due to the fact that the cash value can be lost to market trends.

Variable-universal life insurance

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A type of universal life insurance that has fluctuating premiums and a cash-value component that gains interest. Variable life insurance tends to be more expensive than term life insurance and has a lot of additional fees that can eat up the cash value.

W

Waiting period

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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.

Waiver of premium rider

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A policy add-on that waives the premiums if the policyholder becomes disabled and cannot work. Once the disability ends, premium payments resume. Qualifying for a waiver of premium rider is usually difficult and the disability must fall within specific parameters.

Whole life insurance

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A type of permanent life insurance that has a tax-deferred savings component. Whole life insurance policies are typically 6-10 times more expensive than term life insurance policies, leading to the surrender of 45% of policies within the first ten years of being in force.