If you're shopping for coverage or are in the process of applying for a new policy, it's important to become familiar with these seven life insurance vocabulary basics.
Term life insurance
As the name implies, a term insurance policy covers you for a specific period of time; that can be one year, 10 years, 20 years, or even up to 30 years. As long as premiums are paid, you'll have coverage for the specific term as outlined in your policy. If you die during that term, your beneficiaries get a payout, known as the death benefit. If you die after the term expires, there's no payout.
Permanent life insurance
Also known as cash value insurance, permanent* life insurance includes products such as whole life, universal life, and variable life. Unlike term insurance, these policies are meant to provide coverage for your entire life, as long as premiums are paid. While the primary purpose of life insurance is to provide a death benefit to your named beneficiaries, they also have the potential to accumulate what's known as cash value that can be used for different purposes while you're still alive.**
This is the amount your policy will pay out when you (the insured) dies. How much it will pay out depends on your individual policy and the benefit level you initially selected.
The person who receives the death benefit, or payout, upon the death of the insured is the beneficiary. As the insured policy owner, you can name as beneficiary anyone who has an insurable interest in your life - a spouse, child, relative, or even a business associate. You could even have your proceeds paid to a trust or your favorite charity. And in case your original beneficiary isn't alive to receive the payout, you can name contingent beneficiaries.
Underwriting is the process through which an insurer decides whether it will provide you with life insurance based on potential risks associated with your age, past medical history, and other factors. The underwriting process also helps determine what your premium may be.
For an additional premium, you can add additional benefits to your life insurance policy. Referred to as policy riders or endorsements, these add-ons can enhance your existing coverage in a variety of ways depending on your needs. Common riders include guaranteed insurability, waiver of premium, child rider, and accelerated death benefit.
* As long as required premium payments are timely made.
** Access to cash value through borrowing or partial surrenders will reduce the policy's cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.