common life insurance terms
Life Insurance

What is life insurance?

Death is inevitable, but you can save your family the agony of financial incapacitation. That’s why purchasing life insurance is crucial. If you happen to die, those you designated as beneficiaries will get paid by your insurer. This brings us to an avid understanding of life insurance.

In short, a life insurance policy is an agreement between an individual and insurers to pay out a lump sum amount to beneficiaries upon your death. As a policyholder, you’ll pay the insurer the agreed premiums for your coverage to be operational. You can get a cost estimate by using a life insurance calculator.

Types of Insurance

The Principle Types of Life Insurance Clarified

Life insurance is categorized into two major types: term and whole/permanent. With increased cases of life-threatening illnesses and evolving lifestyles, having an in-depth understanding of these two types of life insurance helps you make critical financial decisions.

Term Life Insurance

Term insurance agreement allows the insurer to pay a specific amount of money to your family in case of your untimely death. Ideally, this contract can range between 10 -30 years. More so, it has the following features.

If your family will receive a huge amount of money upon your death and you’re unsure if they can manage a lump sum payment, you can opt for multiple payment options.

Being young and bubbly is the best feeling, and you might think you can suffer from diseases like kidney failure or cancer. Life is unpredictable, and having a life insurance cover is the best policy to purchase. You can add a critical illness rider to your cover to get additional benefits. It means your family and loved ones won’t bear any financial burden for your treatment.

According to the WHO, cancer, cardiovascular diseases, and stroke are major life-threatening ailments that need critical illness coverage. The minimum age to add a critical illness ride is 18 years, while the maximum is 65. However, the maximum maturity age differs depending on the insurance company.

Adding a rider to your term life insurance helps you extend your cover benefits. Although you will make additional payments, you will get a comprehensive policy.

Life happens, and you can die prematurely. So, secure your family against major financial setbacks.

life insurance common terms

Whole Life Insurance

Unlike the term insurance that covers your life for a specific period, whole life insurance is a policy that covers your entire life. Besides, it includes a saving element paid by your premium. These saving components build cash over time due to the fixed rates. It explains why whole life insurance is more expensive compared to term insurance. Whole life insurance is categorized into:

This is another whole life insurance plan. Sometimes it can be adjustable to offer more flexibility. It means the plan allows you to decrease or increase the death benefit. It also has a cash value element, but the interest rate is not fixed.

is burial insurance that offers an affordable and small death benefit to cover interment costs, outstanding debt, or medical bills. Unlike other policies which come with age limits, final expense life insurance is much easier for seniors and healthy-incapacitated individuals.

The permanent insurance policy is riskier. A face value death benefit necessitates you to choose a fixed death benefit. The variable cash value is included in the death benefit.

Types of Insurance

Basic Life Insurance Terminology

There are common life insurance terms you’ll often hear. Once you understand these terms, you can choose between various policy options. First, let’s find various definitions of life insurance terms.

Insured: The person is covered by the life insurance policy. When they die, the insurance company will pay the beneficiary.

Incontestable Clause: A clause in the life insurance coverage allows the insurer to cancel the contract if the insured did not disclose critical information, which could have otherwise jeopardized his cover.

Death Benefit: A payment made to the beneficiary when the insured dies.

Conversion Right: This is the right granted by some term life policies to alter or adjust the current policy to a whole insurance policy under a given timeframe.

Cost of Insurance: It’s commonly known as the premium. It’s the amount you must pay for your life insurance cover. The monthly cost of insurance varies based on sex, health, lifestyle, sex, and the nature of your profession.

Policy Holder: Ideally, this is the person who buys a life insurance policy. They might be or may not be the insured person. More so, they’re the ones who pay the policy premiums.

Policy Tenure: The duration for which the purchased policy covers the insured. The period tenure ranges from 1-100 years or permanently. Policy tenure can also be known as policy duration or term.

Maturity Age: It’s the age at which the policy expires.

Riders:  These are additional features that expound the life insurance scope. However, different insurance companies offer different riders and at different rates. More so, terms and conditions differ from one insurer to another. The common riders include:

  • Critical illness policy
  • Accidental death benefit
  • Waiver of premiums
  • Accidental death and disability rider
  • Hospital cash rider

Paid-Up Value: If the insured policyholder halts to make premium payment after a certain period, the insurer offers them an option to convert the cover into a paid-up policy. In this case, the amount insured is reduced according to the number of paid premiums.

Free-look Period: When you purchase new insurance, the insurer gives you a time frame to choose whether the policy suits your needs or not. If you have issues with the terms and conditions, you can, therefore, return the policy.

Grace Period: An insurer gives a grace period to pay the renewal premium if the payment has not been made on time. Usually, most companies extend by 15 days for monthly premium payments and 30 days for annual payment options.

We hope learning these common life insurance terms will simply your life insurance purchase process.

FAQ's

With hundreds of insurance companies in the US, selecting a company that offers the products that suit your needs can be perplexing. The process is even more challenging because most of them provide similar products. But you can have a seamless process by asking six questions before purchasing a policy.

Choosing the right life insurance company is choosing peace. So, make a point of choosing an insurer that has what you need. Then, review their products and check their terms and conditions for offering term and whole life policies
The primary purpose of purchasing a life policy is to ensure your loved ones are protected against financial incapacitation in case of your death. Hence, an insurance company should be in a position to pay your beneficiary on time. That is why choosing a financially stable company is paramount.
You can check your potential company's creditworthiness to gauge its financial capabilities. You can check the company’s rating from reliable firms like AM Best. The firm issues grades, with A+ being the best rating. However, each independent rating firm has its rating rates. You can, therefore, check different ratings from various firms.
So, don’t judge the stability of an insurer by its size. Some companies have been in the industry for decades, but they’re not stable enough. You can also find small firms with solid financial histories.
Reputation is a critical facet to check when picking a life insurance company. The track record gives you a hint on how they can handle your case, their payment modes, and how timely they make the payments. In addition, the state insurance department will give you a glimpse of how reliable an insurance company is.
It gives you information about how the insurer deals with claim disputes, premiums, policy cancellations, among other issues. More so, you can read reviews to get invaluable information.
A reliable company offers stellar customer service. You would notice professional and courteous employees who take your issues seriously. Customer support ensures your purchasing process is seamless and easy. Your submissions will be handled professionally and with utmost urgency.
Ask if the insurer offers online services that make managing your policy easy. For example, do they offer phone, email, or social media support? Are their services 24/7?
common life insurance terms and questions

Common Life Insurance Myths

Approximately 54% of the US population tends to overvalue the cost of life insurance. The policy comes in different ranges, and you can always have a smaller policy.

The payment a beneficiary receives is not taxable. But any accrued interest from the payout must be included on the annual tax returns.

Being a stay-at-home mom or dad with no income should not make you not have life insurance. On the contrary, purchasing a life policy will benefit your young children and cater to their needs while the surviving partner works during the day

A life insurance policy doesn’t benefit your children or spouse only. However, the policy can cover your debts or burial expenses. It ensures these expenses won’t overburden your friends and family.

Conclusion

A life insurance policy comes with tons of benefits. It protects your family against financial predicaments in the event of your death. It’s also an excellent retirement plan. After going through these common life insurance terms, you’ll have a hassle-free process of purchasing your policy.