This article is the third in a three-part series, designed to provide some life insurance guidance. First, the basics: No matter what type of policy you have, its basic purpose is to pay a death benefit to the policy beneficiaries when the insured dies. With that backdrop in mind, let's look at some of the life insurance terminology you'll find as you review your life insurance options:
EndowmentEvery life insurance policy will stipulate what happens at the end of the contract. Some policies expire, others mature, and others endow. Some life insurance policies are endowments. This means that when the policy contract ends, the policy values are distributed to the policy owner.
MaturityFor many whole life and universal life policies, the end of the premium payment period signifies that the policy has matured. Premiums no longer need to be paid and the death benefit or cash value, depending on the policy, will be paid to the policy owner.
ExpirationMost term life insurance policies expire at the end of the contract period. At expiration, a term policy has no cash value. The insured was covered during the policy period. When the period ends, coverage ends.
Face amount / Death benefitThe face amount refers to the amount of insurance declared on the face page of the policy contract. The face amount is the same as the death benefit, the amount distributed to the named beneficiaries when the insured dies. For cash value life insurance policies, the death benefit will be reduced by any prior withdrawals, unpaid loan balances, and/or unpaid premiums.
PremiumThe premium is the amount paid to the insurance company, usually by the policy owner. The amount of the premium is determined by many factors, like the age and gender of the insured, the face amount of the policy, and the risk classification the insurance company assigns to the insured.
Surrender chargeSome policies that earn cash value will limit the amount of cash value that can be borrowed or withdrawn from the policy. The surrender charge period is usually applied during the early years of the policy. When the surrender charge period is in effect, the amount of cash value available to the policy owner is reduced by the amount of the surrender charge.
Someone applying for life insurance is referred to as the applicant. The insurance company evaluates the applicant to determine the amount of premium required to cover the risk the insurance company assumes when the policy is issued. The risk classification is usually determined by the applicant's health and smoking status. Once the policy is issued, the risk classification cannot be changed by the insurance company. The risk classification can be found on the face page of the insurance policy contract.
Now you know seven of the most common policy terms. Did you also read part one and part two of this three-part article series? If not, check out our article on life insurance policy roles and our article on life insurance types.
Note: This basic information is intended to give you a good foundation on which to begin a conversation with your agent about life insurance. Your agent should be able to answer all the questions you have about your life insurance options, how much you will pay, and the protections each policy provides.