Life Insurance Terms: Key Definitions

Life insurance comes with its own set of terms and definitions that are important to understand when purchasing a policy. Here are key terms and their definitions commonly used in life insurance:

1. Beneficiary: The individual or entity named in the life insurance policy to receive the death benefit when the insured person passes away.

2. Policyholder (Insured): The person who owns the life insurance policy and is typically the one whose life is insured. The policyholder pays the premiums.

3. Premium: The regular payments made by the policyholder to the insurance company to keep the policy in force. Premiums can be paid monthly, quarterly, semi-annually, or annually.

4. Death Benefit (Face Amount or Coverage Amount): The sum of money paid to the beneficiary when the insured person dies. This is the primary purpose of life insurance.

5. Cash Value: In permanent life insurance (such as whole life or universal life), a portion of the premium payments accumulates in a tax-advantaged cash value account, which can be borrowed against or withdrawn.

6. Term Life Insurance: A type of life insurance that provides coverage for a specific term, such as 10, 20, or 30 years. It does not accumulate cash value and is designed to provide a death benefit only.

7. Permanent Life Insurance: A type of life insurance that provides coverage for the lifetime of the insured. It typically includes a cash value component and may offer policyholders the option to accumulate savings.

8. Whole Life Insurance: A type of permanent life insurance that provides a guaranteed death benefit and accumulates cash value over time.

9. Universal Life Insurance: A type of permanent life insurance that offers flexibility in premium payments and death benefit amounts. It also accumulates cash value.

10. Term Length: The duration for which a term life insurance policy is in effect. Common term lengths are 10, 20, or 30 years.

11. Underwriting: The process of evaluating an applicant's health, lifestyle, and other factors to determine eligibility for coverage and the premium rate.

12. Policy Lapse: When a policyholder stops paying premiums and the insurance policy is terminated.

13. Riders: Additional provisions or options that can be added to a life insurance policy to enhance or customize coverage. Examples include accidental death riders, disability income riders, and waiver of premium riders.

14. Contestability Period: A specific period (typically the first two years of the policy) during which the insurance company can investigate and contest a claim based on misrepresentation or fraud.

15. Suicide Clause: A provision in the policy that specifies a waiting period (usually two years) before the full death benefit is paid if the insured dies by suicide.

16. Incontestability Clause: A provision that prevents the insurance company from contesting the policy due to misrepresentations after a specified period, usually two years from the policy's issuance.

17. Grace Period: A period (typically 30 days) after the premium due date during which the policy remains in force, even if the premium has not been paid.

18. Policy Loan: A loan taken against the cash value of a permanent life insurance policy. The loan must be repaid with interest or deducted from the death benefit if not repaid.

19. Surrender Value: The amount of cash value that the policyholder can receive if they choose to surrender or cancel a permanent life insurance policy before its maturity.

Understanding these life insurance terms is crucial when considering and managing your life insurance coverage. If you have questions about specific terms or how they apply to your policy, it's advisable to consult with your insurance agent or company for clarification.