If you are not a professional or expert in the insurance industry but are looking to purchase life insurance, it’s very likely you will come across some unfamiliar terminology as you continue your search for the ideal policy.
Under two general rubrics, here are a dozen of the most important life insurance terms you need to know:
1. General Life Insurance Terms
No matter which type of life insurance policy you buy, you will need to know such terms as the following:
- Policy owner, insured, and beneficiary. The beneficiary is the person to whom the death benefit will go in the event of the death of the insured party. The insured is normally also the policy owner, but it can sometimes be a third party instead.
- Insurable interest. You can’t just insure anyone, necessarily. There must be a relation of blood, affection, or some factor that makes it desirable to the beneficiary that the insured continue to live.
- Premium. The premium is the dollar amount the policy holder must pay monthly, quarterly, or annually to prevent the forfeiture of the policy.
- Risk classification. This is basis of how an insurance company determines its premiums. Age, sex, occupation, health condition, family medical history, and more help to determine who is a “standard” vs. “substandard” risk.
- Underwriting. This is the process by which an insurer determines if you are insurable and/or how much your premium will be. It may include a series of health questions and a short medical exam.
- Rider. A “rider” is any extra provision added to an insurance policy that modifies it by including extra coverage or by reducing coverage.
- Settlement options. Normally, you have some options on how the death benefit will be received. It can be paid out in a single lump sum, in regular installments, in installments with interest, or simply the interest can be paid while the benefit itself is kept on deposit by the insurer.
2. Specialized Life Insurance Terms
When you are dealing with a specific type of insurance, such as term or whole life, there are some additional terms that come into play, including these:
- Term, whole, or universal life. Term life buys you coverage for a specific period of time only, while whole life pays out no matter when the insured passes away. Universal life is like whole life but with more flexibility and more risk – it’s like a quasi-investment plan.
- Cash value. A whole life policy accumulates cash value over time. This is the amount of money you can get out of the policy were you to terminate it early. You can also take borrow against the cash value with only very low interest charged on the loan.
- Automatic renewal. This means you are guaranteed, on a term life policy, the option of renewing the policy after the term expires. The rate may go up based on age, but you can’t be refused the option to buy.
- Dividend. Some whole life policies include a provision whereby you not only accumulate cash value but also can potentially earn interest (dividends) as you continue to make on-time premium payments.
- Limited pay. Limited pay whole life lets you pay for only a “limited” period of time (usually 10 or 20 years) but never lose the benefit.
To learn more about common life insurance terms, or for a free quote, feel free to contact Flagler County (FL) Insurance Agency today!