You’ve never bought life insurance?
Or you bought a life insurance policy in the past, but you didn’t understand what you were getting into?
Maybe you just bought a policy from someone in the family? Or perhaps you smoke marijuana and want to know how it affects your ability to get life insurance?
In any of these cases, you might be confused about some of the massive amounts of life insurance jargon you’ve encountered.
This post is here to help. Below, I’ve listed and defined (with examples) the most important life insurance jargon you need to understand.
Someone who gathers and evaluates data for appraising insurance risks. An actuary sets premiums based on this analysis.
A related term is “actuarial science”, but you won’t often see that mentioned when buying life insurance. That expression just refers to the methodology behind the actuarial process.
Being an actuary is an excellent career choice. Demand is high, and the supply of actuaries is short. As such, this is one of the highest-paid professions in the United States.
A fixed amount of money paid to a person on an annual basis for the rest of her life. Some life insurance plans include annuities as their benefit rather than a lump-sum (one-time) payment.
Annuities aren’t just used in life insurance. Lottery winners often get their winnings in the form of an annuity. A reverse mortgage is another type of annuity.
People who buy annuities are insuring themselves against running out of capital or income before dying.
The person who gets something from a benefactor—at least that’s the broad definition. In the context of life insurance, the beneficiary is the person who gets the money when the life insurance policy pays off.
The etymology makes it clear that several words are related to “beneficiary”. People rarely call an insurance company a “benefactor”.
But everyone seems familiar with the phrase “benefit” and how it relates to an insurance policy.
And it’s hard to not see why and how a life insurance policy is “beneficial” to the survivors.
A type of life insurance that’s intended to pay for nothing more than the burial of the deceased. Depending on how elaborate the funeral arrangements need to be, a burial insurance policy usually only pays out between $5000 and $25,000 in benefits.
Burial insurance works like other life insurance policies. You pay for the policy and designate a beneficiary. That person gets the money if you die.
If your funeral expenses are less than the benefit, your beneficiary gets to keep that amount.
For example, if you have a burial insurance policy of $25,000, and your funeral only costs $5000, your beneficiary has $20,000 left over.
With most life insurance policies, you accumulate a certain amount of cash value along with your death benefit. In other words, your insurance policy serves 2 functions:
Not all life insurance policies have a cash value. Term life, for example, does not.
The “cash value” of a life insurance policy is the amount that the investment portion of the policy is worth.
The amount of money your beneficiary gets in the event of your death. For example, if you have a death benefit of $100,000, your beneficiary gets a check for $100,000 when you die.
Some of this death benefit usually pays for the funeral. The amount also often replaces the income of someone who’s died, at least for a period of time. Someone might also carry enough life insurance to pay for his children’s college education.
Some life insurance policies pay off double if you die for certain unusual reasons. The specific reasons are spelled out in the policy itself.
These reasons are usually accidents (including murder). Some restrictions apply, though. If the murder were the result of collusion, for example, the double amount wouldn’t pay off.
Double Indemnity is the name of one of the greatest films noir of all time, too. It stars Fred MacMurray, Barbara Stanwyck, and Edward G. Robinson. It’s about a pair of lovers who orchestrate a murder on a train with the goal of splitting the death benefit of the policy.
The amount of time between your payment’s due date and the date your policy gets canceled.
Here’s an example:
You have a life insurance policy with a grace period of 30 days. Your payment is due on December 15, but you can’t make the payment until December 31.
Since you’re able to make the payment before the end of the grace period, your policy doesn’t lapse.
On the other hand, if you weren’t able to make the payment until February 1, that would be more than 30 days. Your life insurance policy would be canceled.
Insurance companies use massive amounts of data about average ages when people die to determine your life expectancy. This is the amount of time they statistically expect you to live.
Life expectancy is a statistical average. You might live longer than your life expectancy, or you might not make it that long.
But since an insurance company is insuring thousands of customers, the averages work out in such a way that they’re able to mitigate risk, price their products accordingly, and make a profit.
Your age is only one factor in calculating your life expectancy. Your height, weight, lifestyle choices, and medical history also affect your life expectancy.
If you’re worried about these things, you might be best served by looking into a no exam life insurance application.
A living benefit is a rider added to an insurance policy that pays off if something happens other than your death.
For example, you might have a living benefit that pays off 10% of your death benefit if you’re diagnosed with a fatal disease. You might also get a living benefit if you have an accident which might prevent you from working.
As a rider to your policy, the living benefits are in addition to your other benefits.
A life insurance policy where you’ve made all your payments is called a “paid-up” insurance policy. You no longer have to pay premiums, but your beneficiary still gets benefits when you die.
You’re allowed to cash out a paid-up insurance policy, but there are usually significant sized fees involved when doing so.
The opposite of term life insurance. A permanent life insurance policy is one that never expires. A term life insurance policy only covers you for the term of the policy.
Both permanent and term life insurance policies have their pros and cons.
The biggest benefit to permanent life insurance is that it never expires as long as you’ve paid your premiums. It also accumulates a cash value—which is something a term policy doesn’t do.
The amount you pay per month to keep your life insurance policy. With most life insurance policies, this premium accumulates in value until your life insurance policy is “paid-up”. If you die before the policy is paid up, though, the policy still pays benefits to your beneficiary.
Premiums go up based on how low your life expectancy is. Older people in poor health pay higher premiums, because the insurance company is more likely to have to pay out sooner rather than later.
Young people in good health are likely to live a long time, so their premiums are lower.
An additional benefit (and its associated cost). For example, a life insurance policy that includes a benefit in case you’re disabled in an accident has a rider. That rider is the additional benefit and its associated cost.
Here’s an example:
You have a life insurance policy for $100,000 that costs $100/month.
You also have a rider which pays off $35,000 if you’re disabled in an accident. There’s a $35/month extra cost for that additional benefit.
A life insurance policy can have multiple riders, depending on what’s available via that life insurance company.
The premiums for a life insurance policy cost more when you present a higher risk to the insurance company. The underwriter at the company assigns you a “risk classification”, which measures how likely it is that the company will have to pay out more than they take in from your premiums.
These risk classifications can vary from one insurance company to another, but many of them are standard. For example, a risk classification of “preferred plus” refers to someone in excellent health who isn’t overweight and has no chronic illnesses. To be preferred plus, you must also have lab results in the normal range and no close relatives who died from cancer or heart disease before the age of 60.
“Preferred” is a more common risk classification. You can fall into this category if you’re only a little overweight. You can also get away with high blood pressure or high cholesterol as long as they’re being treated.
There are also have “standard plus”, “standard” and “substandard” classifications.
Being a smoker also affects your classification. See the next section for details.
This is an additional rating added to your risk classification. For example, you might classify as “preferred” but “preferred smoker”. In other words, you qualify for the “preferred” risk classification, but because you’re a smoker, you’ll pay a higher premium.
Most insurance companies define smokers as people who have smoked tobacco over the last 12 months. Different companies have different policies related to cigar smoking or the use of oral tobacco products (snuff or chewing tobacco).
A term life insurance policy is the opposite of a permanent life insurance policy. It’s called a “term” policy because it’s only in place for a certain period of time. Then it expires, and you no longer have coverage.
Term life insurance is generally less expensive than permanent life insurance. But it has no usefulness as an investment vehicle.
Some consumers assume that they’ll only need coverage for a certain period of time. For example, a customer might only want insurance to cover her daughters’ tuition payments for college if she dies before they graduate.
Once the daughters have graduated college, she no longer sees the need for the policy.
The underwriter is the person at the insurance company that assigns your risk classification. This also means that the underwriter determines how much your premiums are, albeit indirectly.
The underwriter is not the same as an actuary. The actuary sets overall policies related to the sizes of premiums versus the benefit amounts.
The underwriter handles the assignment of individual risk factors and the specific implementations of the policies put in place by the actuaries.
Underwriting is a desirable job, too, although it’s not as in demand or as lucrative as being an actuary.
A type of life insurance that has a cash value. The amount paid beyond the cost of the insurance is added to the cash value of the policy.
Universal life insurance policies earn interest on the investment portion of the insurance policy over time. This interest is often based on the return you’d see from a specific investment in an index fund in the stock market.
Universal life insurance is a type of permanent life insurance.
Guaranteed universal life insurance has a locked in death benefit without the investement component.
This is another type of permanent life insurance that’s distinct from universal life insurance. A whole life insurance policy has consistent premiums and the cash value that accumulates is guaranteed.
But a whole life insurance policy is less flexible than a universal life insurance policy. The latter offers some flexibility to the customer in terms of premiums and the investment aspects of the policy.
Of course, this isn’t a comprehensive glossary of life insurance jargon.
It’s more of an introduction. I’ve tried to include the phrases you’re most likely to encounter.
I’ve also tried to focus on terms and expressions you’re most likely to misunderstand.
Got a question about life insurance vocabulary that I didn’t answer above?
Ask me about it in the comments.
I’ll either reply in the comments, expand this post with the answer, or both.