Life insurance terms can be confusing when you first come across them, so learning the language of life insurance can help when you’re thinking about or shopping for a policy.
You may know that for many people, life insurance is important to have, and perhaps you’ve started some initial research into life insurance policies.
Learning common life insurance definitions can help you make an informed decision when looking into coverage options.
Life Insurance Terms
Discover life insurance definitions, simplified.
Accidental Death Benefit
If a life insurance policy includes an accidental death benefit, the cause of death will be examined to determine whether the insured’s death meets the policy’s definition of accidental. This is often a rider, or additional benefit for an additional fee, attached to the policy. An example of an accidental death could be one caused by a car crash, slip, or machinery.
Annuity
This is a contract in which the buyer deposits money with a life insurance company for investment on a tax-deferred basis. Annuities are designed to help protect the contract holder from the risk of outliving their income.
An annuity may include a death benefit that will pay the beneficiary a specified minimum amount.
Beneficiary
This is the person or entity designated to receive the death benefit from a life insurance policy or annuity contract.
Contestable Period
For up to two years, a life insurance company may deny payment of a claim to beneficiaries because of suicide or misrepresentation on an application — for example, if the insured was listed as a nonsmoker but smoked often and died of complications related to that.
Death Benefit
The amount that will be paid to the beneficiary upon the death of the insured. The phrase “death benefit” is common life insurance terminology you’ll see in a life insurance policy.
Evidence of Insurability
In order for you to qualify for a particular policy at a particular price, companies have the right to ask for information about your health and lifestyle. An insurance company will use this information when deciding on approval and rate. If you are overweight, a smoker, or have a history of health problems, your policy will likely cost more than someone without those issues.
Free Examination Period
Also known as the “free look period,” this is a 10- to 30-day window during which you can cancel your new policy without penalty and get a refund of premiums.
Group Life Insurance
This provides coverage to a group of people under one contract. Group contracts are often sold to businesses that want to provide life insurance for their employees. Group Life Insurance can also be sold to associations to cover their members.
Insured
This is the person whose life is insured by the policy. The insured may also be the policyholder.
Permanent Life Insurance
These kinds of policies can provide lifelong coverage and the opportunity to build cash value, which accumulates tax-deferred. Whole life and universal life insurance policies fall under this umbrella term. Permanent life insurance is more expensive and complicated than term life insurance.
Policy
This is the official, legal document that includes the terms of the policy owner’s insurance. The policy will name the insured, the policy owner, the death benefit, and the beneficiary.
Policyholder
The person who owns the life insurance policy. It can be the person who is insured by the policy.
Premium
The payment the customer makes to the insurance company to pay for the policy. It may be paid annually, semiannually, quarterly, or monthly.
Term Life Insurance
This type of life insurance offers coverage for a set number of years, or “term,” of the insured’s life, commonly 20 or 30 years. If the insured individual dies during the years of coverage, a death benefit will be paid to the beneficiaries. Term life insurance costs less than permanent life insurance.
Recommended: 8 Popular Types of Life Insurance for Any Age
Underwriting
Often viewed as a mysterious process, underwriting is simply when factors are evaluated relating to the applicant’s current health, medical history, lifestyle habits, hobbies, occupation, and financial profile to determine eligibility for coverage as well as what the appropriate premiums should be.
Universal Life Insurance
With this kind of permanent life insurance, policyholders may be able to adjust their premium payments and death benefits. The cash value gains vary depending on the type of universal life insurance policy purchased.
Variable Life Insurance
With variable life, another type of permanent life insurance, the death benefit and the cash value fluctuate according to the investment performance of a separate account fund.
Earnings accumulate tax-deferred. Fees and expenses can reduce the portion of premiums that go toward the cash value.
Whole Life Insurance
Whole life is another type of permanent cash value insurance. The premiums, rate of return on cash value, and death benefit are fixed and guaranteed. The cash value component grows tax-deferred. Whole life tends to be more expensive than other types of permanent insurance.
Recommended: Term vs. Whole Life Insurance
The Takeaway
Life insurance can be an important way to protect your loved ones’ financial future in the event of your death. While its terms can be a mouthful, they don’t have to be confusing. Understanding the definitions of life insurance can help you put a plan in place to protect your family.
If you’re shopping for life insurance, SoFi has partnered with Ladder to offer competitive term life insurance policies that are quick to set up and easy to understand. You can apply in just minutes and get an instant decision. As your circumstances change, you can easily change or cancel your policy with no fees and no hassles.
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Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, Social Finance. Inc. (SoFi) and Social Finance Life Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under Ladder Life™ policies. SoFi is compensated by Ladder for each issued term life policy.
SoFi Agency and its affiliates do not guarantee the services of any insurance company.
All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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