Life Insurance Glossary
Finding Term Life Insurance can be stressful. If you’re not an insurance pro, there may be some terms and lingo thrown around that you may be unfamiliar with. SkyBlue Insurance is here to help. Below we’ve created a Life Insurance Glossary defining some of the terms you may encounter when looking for Term Life Insurance.
Accelerated Death Benefit: This benefit is sometimes part of the policy and at times is added as a rider. It will pay the benefit (sometimes a lesser amount than the death benefit) under certain specified conditions, such as a terminal disease (check your policy for exact conditions and the maximum amount paid). Take note that if this benefit is exercised, it will reduce the actual death benefit by the amount of Accelerated Death Benefit paid.
Accidental Death Benefit: A payment for loss of life due to an accident which was the direct cause of death. A provision added to a life insurance policy for payment of an additional benefit, above and beyond the death benefit, when death occurs by accidental means, as defined in the policy.
Annual Renewable Term (ART) Life Insurance: Term life insurance that renews on an annual basis. The premiums typically increase every year on the policy anniversary date of the policy.
Annuity: A contract that provides a periodic income at regular intervals, usually for life.
Annuity Certain: A contract that provides an income for a specified number of years, regardless of life or death.
Assets: Anything of value that is owned. An insurance company will sometimes request you list your total assets and liabilities on the application to help them evaluate, in conjunction with your income, your need for the amount of death benefit applied for.
Assignment: The signed transfer of the benefits of a policy to another party by a policy owner. If the insurance company is given due notice of the assignment, the policy benefits will accrue to the person named as assignee. The company does not guarantee the validity of an assignment.
Attending Physician’s Statement (APS): A report the insurance company requests from an applicant’s personal physician when additional information is needed to support medical information disclosed in the application or in the medical examiner’s report. If there is no significant medical history, at the discretion of the underwriter, an APS might not be required. Due to physicians’ busy schedules, it sometimes takes quite a while to receive the APS from a physician and, therefore can increase the time it takes to underwrite your policy.
Backdating: Some insurance companies allow policies to be dated earlier than the actual date issued in order to save age. By underwriting at a younger age, the premiums will typically be lower than if the policy is dated at the actual date. However, take note that premiums will be due from the date on the policy, not the actual date.
Beneficiary: The person named in the policy to receive the insurance proceeds at the death of the insured. Anyone can be named as a beneficiary.
Binding receipt: The receipt for payment of the first premium, which assures the applicant that, if he or she dies before receiving the policy, the company will pay the full claims if the policy is issued (or would have been issued) as applied for.
Bonus Rate Annuity: An extra percent of interest credited to an annuity during the first year that it is in force. The extra amount is above the interest rate to be credited beginning the second year and the remaining years that the annuity is in force. The extra rate is paid in the first year in an effort to attract new policyholders.
Burial insurance: A general term usually referring to a small policy of life insurance ($5,000 to $25,000) intended only to meet the final expense needs of the insured.
Business continuation insurance: Generally refers to a life insurance policy used to fund a business continuation plan (also see buy-sell insurance).
Business Insurance: Life insurance coverage concerned primarily with the protection of an insured’s business or vocation. Business insurance protects a business against the loss of its valuable lives or key executives; stabilizes the business through the establishment of better credit relations; and provides a practical plan for the retirement of business interests in the event of the death of one of the owners.
Buy-Sell agreement: An agreement between the owners of a business, which provides that the interest of any one of them who dies shall be sold to and will be purchased by the surviving co-owners or by the business at a value agreed upon by the parties and stipulated in the agreement. Also applies to buyout arrangements between owners and key employees.
Cash Surrender Value: The amount available in cash upon voluntary termination of a policy by its owner before it becomes payable by death or maturity. The amount is the cash value stated in the policy minus a surrender charge and any outstanding loans and any interest thereon.
Charitable trust: A trust designed for the benefit of a class or the public generally. Is essentially different from a private trust in that the beneficiaries are not designated individually.
Child rider: A rider is an attachment to a policy that adds something to the policy (as opposed to being established in the body of the policy). A child rider allows parents to purchase life insurance for their children (all in one rider), without having to purchase a separate policy for each child.
Collateral assignment: In insurance, the assignment of a policy to a creditor as security for a debt. Under a collateral assignment, the creditor is entitled to be reimbursed out of policy proceeds for the amount owing to him or her; the beneficiary is entitled to any excess of policy proceeds over the amount due the creditor in the event of the insured’s death.
Conditional receipt: A receipt given to a life insurance applicant if all or part of the premium is paid at the time of application. This receipt does not provide absolute interim insurance (during underwriting) until the company acts on the application, but stipulates that the company will assume the risk of the death of the insured after the date of the application if it later approves the application or, more frequently, if the insured meets with the company’s rules of insurability for the plan applied for as of the date of the application.
Contestable clause: That section of an insurance contract which states conditions under which the policy may be contested or voided. Also see incontestable clause.
Contestable period: The period of time during which an insurer may contest a claim on a policy because of misleading or incomplete information furnished with the application.
Decreasing term life insurance: Term life insurance on which the face value slowly decreases in scheduled steps from the date the policy comes into force to the date the policy expires, while the premium remains level.
Disability rider: A rider in a life insurance policy that, in the event of an insured’s total disability, the insurer will waive payment of premiums falling due during the period of disability. Also known as waiver of premium.
Endowment: In life insurance, a contract which provides for the payment of the face amount at the end of a fixed period, or at a specified age of the insured, or at the death of the insured before the end of the stated period.
Endowment policy: A life insurance policy in which the cash value and face value are equal to each other at the policy’s maturity date; a policy under which the face amount is payable on a specified future date (maturity date) if the insured is then living, or at the insured’s death, if that should occur sooner.
Estate planning: The total process of planning an estate, including: (a) estate creation and conservation during the owner’s life; (b) the minimization of state shrinkage at death; (c) the creation of adequate liquidity for estate settlement costs; and (d) a plan for proper estate distribution to the owner’s heirs.
Estate tax: A tax levied upon the right to transfer property at death, imposed upon and measured by the estate that the deceased leaves.
Evidence of Insurability : A statement or proof of your health, finances or job, which helps the insurer decide if you are an acceptable risk for life insurance.
Face Amount: The amount stated on the face of the policy that will be paid in case of death or at the maturity of the policy. It does not include additional amounts payable under accidental death or other special provisions, or acquired through the application of policy dividends.
Flat extra premium:
Premium added on top of the regular premium of a life insurance policy to cover added risk, typically that of high risk occupations or activities (e.g. flying an aircraft). The insurance company adds a flat extra fee per thousand dollars of death benefit. An example of this would be a pilot paying and extra $2 – $3 per thousand dollars of benefit. In this example, a pilot taking out a $1 million policy would pay an extra $2,000 – $3,000, over and above the normal premium.
Free Look Provision: A certain amount of time provided (usually between 10-30 days) to an insured in order to examine the insurance policy and if not satisfied, to return it to the company for a full refund.
Group life insurance: A form of life insurance covering a group of persons generally having some common interest, such as employees of the same company or members of the same union or association, etc.
Health Class: Life insurance companies factor in health and lifestyle information to determine the risk insuring you would present to them. In order to determine premiums based on different degrees of risk, the insurance companies have established health (or risk) classes. There are no industry standards, but the health classes are typically Preferred Plus, Preferred, Standard Plus and Standard for non-tobacco users. Below these classes are sub-standard (or rated) categories. There are also separate classes for tobacco users.
In-Force: In life insurance, a term denoting that a policy has been issued, premiums are current and coverage is in place.
Intestate: One who dies leaving no will. Also, the condition of dying without a will.
Irrevocable beneficiary: A beneficiary that cannot be removed from an insurance policy without his or her formal (written) consent.
Irrevocable Life Insurance Trust (ILIT): An irrevocable trust is a trust which cannot be terminated by the donor (grantor). The ILIT is used to own an insurance policy for the purpose of keeping the life insurance proceeds free of federal estate tax upon the death of the insured. Once the trust is established, it is irrevocable, which means it can never be changed, except by the courts and then only under very special circumstances.
Lapse Rate: The rate at which life insurance policies terminate because of failure to pay the premiums. When policies are lapsed before enough premium payments are made to cover early policy expenses, the company must make up this loss from remaining policyholders. Therefore, the lapse rate will affect the cost of the policy.
Life Expectancy: The probability of an individual living to a certain age according to a particular mortality table. This is the beginning point in calculating the pure cost of life insurance and annuities and is reflected in the basic premium.
Life insurance trust: A trust for the purpose of distributing life insurance proceeds. Life insurance companies usually cannot act as trustees or guardians, nor exercise discretion in making payments to beneficiaries. In some cases, it is advisable to have the policy proceeds paid into a trust and distributed under the terms of a trust agreement, thereby permitting greater flexibility in the distribution of the proceeds.
Living trust: A trust created to take effect during the lifetime of the grantor.
Lump sum: Payment of the entire proceeds of a life insurance policy in one sum. The method of settlement provided by most policies unless an alternate settlement is elected by the policy owner before the insured’s death or thereafter by the beneficiary before receiving the payment.
Medical Information Bureau (MIB): A data pool service that stores coded information on the health histories of people who have applied for life or health insurance with subscribing companies in the past. Most life insurance companies have subscriptions with the MIB.
Modal Premium: The frequency with which premiums are paid (monthly, annually, quarterly, semi-annually)
Mortality: The incidence of death at each attained age; frequency of death.
No-lapse guarantee rider: A rider sometimes offered with a universal life insurance policy that guarantees that the policy will never lapse, and the death benefit and premiums will never rise, even if the cash value of the policy falls to zero, provided that premiums are paid when due. Also known as lapse protection.
Non-Forfeiture: One of the choices available if the policy owner discontinues premium payments on a policy with a cash value. Options available are to take the cash value in cash or to use it to purchase extended term insurance or reduced paid-up insurance.
Non-Participating: A life insurance policy in which the company does not distribute to policy owners any part of its surplus.
Occupational hazard: A danger inherent in the insured’s line of work. This often results in higher premiums.
Paid-up Policy: Insurance on which the policy owner has completed payments, but which has not matured. This may be either (1) reduced paid-up insurance provided under the non-forfeiture provision; (2) a limited payment policy under which all premiums have been paid; or (3) a policy on which accumulated dividend are applied to pay the net single premium required to pay up the difference between the policy’s reduced paid-up insurance and its face amount.
Participating Policy: A life insurance policy under which the company agrees to distribute to policy owners the part of its surplus that its Board of Directors determines is not needed at the end of the business year. The distribution serves to reduce the premium the policy owners had paid.
Permanent life insurance: A term loosely applied to cash value life insurance. This type of policy is meant to last a whole life, as opposed to term, which is in force for a specified period of time or term.
Policy Proceeds: The amount actually paid on a life insurance policy at death or when the policy owner receives payment at surrender or maturity.
Premium: The payment, or one of the periodic payments, a policy owner agrees to make for an insurance policy. Depending on the terms of the policy, the premium may be paid in one payment or a series of regular payments, e.g., annually, semi-annually, quarterly or monthly. The premium charged reflects the expectation of loss, expenses and profit contingencies.
Primary Beneficiary: The beneficiary specifically designated by the insured as the first in priority to receive policy proceeds.
Rating: The basis for an additional charge to the standard premium because the person insured is classified as a greater than normal risk usually resulting from impaired health or a hazardous occupation.
Reduced Paid-up Insurance: A form of insurance available as a non-forfeiture option. It provides for continuation of the original insurance plan, but for a reduced amount, without further premiums.
Reinstatement: Restoring a lapsed policy to its original premium paying status, upon payment by the policy owner, with interest, of all unpaid premiums and policy loans, and presentation of satisfactory evidence of insurability by the insured.
Renewable Term: Term life insurance under which the insured has the right, at the end of the term, to elect to continue the insurance for another term (at the premium for his or her then attained age) without submitting evidence of insurability.
Return of Premium (ROP) term life insurance: A term life insurance policy in which all the premiums paid to the insurance company are returned to the policy owner at the end of the term, if he or she has outlived the term.
Rider: An endorsement to an insurance policy that modifies clauses and provisions of the policy, including or excluding coverage.
Risk Classification: The process by which a company decides how its premium rates for life insurance should differ according to the risk characteristics of individuals insured (e.g., age, occupation, sex, state of health) and then applies the resulting rules to individual applications.
Saving Age: The act of backdating a policy to a date closer to the applicant’s last birthday in order to lower the premium. In backdating, premiums are payable as of the policy date.
Second-to-die life insurance: A life insurance contract which covers two lives and provides for the payment of the proceeds upon the death of the second insured. Also known as survivorship life insurance or joint survivor life insurance, this type of policy is typically used to pay estate taxes upon the death of the second insured. It is also often used by parents of special needs children to ensure the child will be provided for after the death of both parents.
Section 1035 exchange: Under IRS Section 1035, a policy owner can exchange one life insurance policy with another and transfer the accumulate cash value from the old policy to the new one without incurring any taxes on the cash accumulation. The transfer must occur between two like policies and must be transferred directly from the old insurance company to the new one.
Single premium: The lump-sum premium payment required to cover the entire cost of a life insurance policy.
Split dollar insurance: An arrangement between two people (often an employer and an employee) where life insurance is written on the life of one who also names the beneficiary of the net death benefits (death benefits less cash value), and the other is assigned the cash value (or equivalent amount of death benefits), with both sharing the premium payments (usually the noninsured paying a portion equal to the increase in cash value each year and the insured paying the balance of the annual premium). Upon termination of the plan while the insured is living, the cash value generally would go to the noninsured to compensate for the portion of premiums paid. Upon death of the insured, the amount of proceeds equal to the cah value generally would go to the non-insured, and the balance of proceeds would go to the insured’s beneficiary. This method permits a financially able person (say, a favored employee) to obtain substantial amounts of needed life insurance with a very low premium outlay on his or her part.
Standard Risk: The classification of a person applying for a life insurance policy who fits the physical, occupational and other standards on which the normal premium rates are based.
Substandard Risk: The classification of a person applying for a life insurance policy who does not meet the requirements set for the standard risk. An additional premium is charged on substandard risks to provide for the probability that such a person will have a shorter life span than a standard risk.
Suicide clause: Most policies provide that if the insured commits suicide within a specified period, usually two years after the date of issue, the company’s liability will be limited to a return of premiums paid.
Supplementary Contract: An agreement between a life insurance company and a policy owner or beneficiary in which the company retains at least part of the cash sum payable under an insurance policy and makes payment in accordance with the settlement option chosen.
Surrender: The return for cancellation of a policy to the insurer by the policy owner in exchange for the policy’s full cash value or other equivalent non-forfeiture values.
Survivorship life insurance: A life insurance contract which covers two lives and provides for the payment of the proceeds upon the death of the second insured. Also known as joint survivor life insurance or second to die life insurance, this type of policy is typically used to pay estate taxes upon the death of the second insured. It is also often used by parents of special needs children to ensure the child will be provided for after the death of both parents.
Term life insurance: Life insurance issued for a term of years, normally building up no cash value and expiring without value. Typical term periods are 10, 15, 20, 25 and 30 years
Tertiary beneficiary: A beneficiary designated as third in line to receive proceeds or benefits if the primary and secondary beneficiaries do not survive to receive them.
Underwriter: The person who reviews the application for insurance and decides if the applicant is acceptable and at what premium rate.
Waiver of premium: A rider available with most life insurance policies which exempts the insured from the payment of premiums after he or she has been disabled for a specified period of time.
Whole life insurance: A plan of insurance offering protection for the whole of life, proceeds being payable at death. Premiums may be paid under a continuous premium arrangement or on a limited payment basis for virtually any desired period of years.
Learn the terms on this Life Insurance Glossary so you can be prepared when you shop for insurance. SkyBlue Insurance is an authorized dealer for some of the leading providers of Term life Insurance. We can help you find multiple quotes to compare and narrow down your Term Life Insurance options. Contact us now and request a free Term life Insurance quote and get your results instantly!