Getting life insurance coverage is an important step in securing the financial health of your family if you die and can no longer provide for them. Once you sign your policy papers and pay your first premium, you’ll get either get a physical or electronic copy of your policy which lays out the fine details of your coverage.
Your life insurance policy is a binding document, and as such it has a lot of legalese, but it’s nothing you can’t handle — still, we’re here to break down some of the nitty-gritty for you. Each insurer's policy will look a little different, but this article lays down what you should expect.
How do you read a life insurance policy?
Life insurance policies have a lot industry-specific jargon, but there are a few key things you'll need to review in your policy:
Your personal information: Make sure your name, birth date, and all other personal information is accurate.
The death benefit: The death benefit should match the amount you are purchasing. Check for mistakes now to avoid hiccups down the road.
How much you pay: You'll want to double check that the premiums are accurate, as that is the rate you'll be paying monthly or annually.
When your policy becomes active: This is the date your coverage becomes active.
This section goes by a few different names — it’s often also called either policy specifications or schedule of benefits —but the content is the same: you’ll see the executive summary of your policy and all the important details.
Here’s what will be included that you need to know:
The insured or the policyholder
This is usually the same person — you — but you could be buying a policy for someone else, in which case you’re the policy owner and they are the insured. Essentially, the policyholder is defined as the person who owns the policy and pays the policy premiums, while the insured is the person whose death would prompt the death benefit payout.
You’ve either bought term life insurance or permanent life insurance, which will be listed in your policy.
This number allocated to your policy is good to know — it allows you to identify or confirm your policy when needed.
Policy issue date
The policy issue date is the day that your life insurance application was approved and you were extended an offer for coverage. The key distinction here is that the policy’s issue date doesn’t mean that you actually have life insurance coverage — it’s just the day you were offered a life insurance policy.
Your policy doesn’t actually go in force until your policy’s effective date.
The effective date
The effective date of your policy is the date your life insurance policy goes in force and you have life insurance coverage.
It’s the most important date on your policy. If you die before your policy’s effective date, your beneficiaries will not receive the life insurance payout, even if you die after your policy’s issue date and you were approved for coverage.
Premium class or rate class
Your rate or premium class is based on the health classification you received during the underwriting process, which determines how much you pay for your policy premiums. This is done through a comprehensive evaluation of your medical history, family history, lifestyle, and background, after which you receive one of four classifications:
If you received a classification that comes with expensive premiums due to health or your smoking status, you can apply for reconsideration a year or two after your policy goes in force (and if your health has improved or you’ve stopped smoking). Any changes in your classification will be reflected in your policy.
Life insurance riders
Policy terms and definitions
Also known as general provisions, the policy terms and definitions section of your life insurance contract is devoted to decoding some of the language that you’ll encounter in your policy.
Here are some of the terms you’ll probably see when you're buying life insurance:
Probably the reason you’re buying life insurance in the first place, the life insurance death benefit is the amount of money that will be paid out to your beneficiary or beneficiaries if you die. You’ll be able to see your coverage amount (which can be increased or decreased as your needs change, though with additional underwriting).
The recipient of your policy’s death benefit. Your beneficiary can be one person, multiple people, or even an organization, but it's important to carefully since providing for them is what makes coverage worthwhile. Your policy is unique to you, as you choose who the death benefit goes to, and what percentage of the benefit each beneficiary receives.
Coverage date or policy date
The date that your policy is considered to be in force, or active. If you die after the policy’s effective date, then your policy will pay out the death benefit to your beneficiaries.
The age you are classified as by the life insurance company. It will either be your actual age or your nearest age, depending on the life insurance company.
A non-participating denotation indicates that the policy doesn’t receive any dividends issued by the insurer. All term life insurance policies will see a non-participating denotation because they don’t have a cash value investment component, whereas some whole life insurance policies do.
Also called the insuring agreement, this section puts to use all the terms and definitions from the previous section, summarizing the promises the insurance company is making to you and that you’re making to it — specifically, how much you’re going to pay for your policy premiums, and how much the life insurance company will pay out to your beneficiaries in the event of your death.
Premium and payment information
You’ll always know exactly how much you owe for premiums. For term life policies with level premiums that do not change as you age, you’ll see the cost of paying your premiums monthly or annually. For permanent policies, which may have variable premiums, your policy will showcase a table with the premiums over time.
Other information included here will be about the grace period — the time you have after your premium due date during which your policy will remain active — and reinstatement terms, which will detail when and how you can reinstate your policy if it lapses.
You might also see any exclusions, for example, a suicide exclusion, which notes that the policy won’t pay a death benefit if you die by suicide within two years of your policy being in force.
Ownership and conversion rights
Many policies allow the owner of the life insurance policy to transfer your policy, sell it to a third party, or convert it to a permanent life policy at the end of its term. If you do convert your term policy to a permanent one, you can use the cash value to take out a loan.
Your life insurance beneficiaries — those who will be filing the death benefit claim — will be spelled out and can be adjusted here. Along with seeing who's who in your policy, you’ll also be able to see and update your contingent beneficiaries, what percent of the death benefit your beneficiaries will receive, and if the death benefit will be paid out per capita or per stirpes.
Any updates you make to your life insurance beneficiaries will also be reflected here.
Life insurance riders
You can add supplemental coverage to your policy with life insurance riders. Most of these optional add-ons come at an additional cost and can give you some financial protection while you’re still alive.
Here are some common life insurance riders that may be built into your policy or that you can opt-in for:
Disability income rider
A disability income rider replaces a portion of your income if you become disabled and cannot work. Coverage from these riders usually isn’t as robust as a disability insurance policy is — it’s usually recommended that you forego the rider and purchase an individual policy to adequately protect your income.
Waiver of premium rider
A waiver of premium rider waives your policy’s premiums if you become disabled and are unable to work for up to six months. Qualifying for this rider can be difficult because of the strict parameters under which your disability must fall.
Term conversion rider
Term conversion riders allow you to convert a term life insurance policy to a permanent life insurance policy at the end of the term. It is usually included in your policy at no additional cost. If you plan to utilize a term conversion rider when your policy is set to expire, you should ensure that you begin the process at least six months before the policy’s expiration date to avoid a coverage gap.
Accelerated death benefit rider
If you’re diagnosed with a terminal illness, an accelerated death benefit rider pays out a portion of the death benefit to you while you’re still alive to cover associated medical expenses or the cost of care.
To qualify for this rider, you will likely need a doctor’s note that states that you have a life expectancy of 12 to 24 months, though some life insurance companies may allow you to utilize this rider if your life expectancy is less.
Long-term care rider
Like an accelerated death benefit rider, a long-term care rider pays out a part of the death benefit to cover the costs of long-term care services, such as a nursing home, a private nurse, or any other assisted medical care that are is associated with aging or a critical illness.
Critical illness rider
A critical illness rider is offered by some life insurance companies in the event that you develop a serious illness. If you have the rider on your policy, it will pay out a lump sum that is subtracted from your death benefit.
Frequently asked questions
How do you read a life insurance policy?
A life insurance policy is a technical document with a lot of jargon. Make sure to double check your personal information, death benefit amount, premiums, and when the policy becomes active.
What are some common life insurance definitions and terms?
Your beneficiaries are the people who receive the life insurance funds. Meanwhile, the death benefit is the amount of money your beneficiaries receive. Another important term is the policy premiums, which is how much you pay monthly or annually for the policy.
What are the contents of life insurance policy?
A life insurance policy contains everything you need to know about your coverage — when it begins, when it ends, how much you pay, and how much coverage you have.