Life insurance words, in plain English

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1035 exchange

A tax rule that lets you swap one life insurance policy for another, or for an annuity, without paying tax on the gain at that time. Source

A

A.M. Best rating

A grade from A.M. Best, one of several firms that rate how financially strong insurers are. Each firm uses its own scale. Source

Accelerated death benefit

A feature that pays some of the death benefit early if you have a terminal illness, a certain disease, or a long term care illness. Source

Accelerated underwriting

A faster way to apply that can skip the physical exam. The company uses outside data, like prescription history and driving records, instead. Source

Accidental death benefit

An add on that pays extra, often double or triple, if you die in an accident. Source

AD&D

Accidental death and dismemberment. It pays if an accident causes your death or the loss of a limb or eyesight. Source

Agent

A licensed person who sells insurance for one or more companies. Agents are paid commission. Source

Annual renewable term

A term policy that lasts one year at a time. The premium changes each year based on your age when you renew. Source

B

Beneficiary

The person you name to get the death benefit when you die. You can name more than one. Source

Broker

A licensed person who works for you and shops several companies for options. Brokers are also paid commission. Source

C

Cap rate

The most an index linked product will credit, even if the index goes up more. For example, if the index rises 12 percent and the cap is 7 percent, you get 7 percent. Source

Captive agent

An agent who sells for only one insurance company. Source

Cash value

The savings part of a permanent policy. It grows over time and can be used for loans, cash, or to pay premiums. Source

Child rider

A rider that adds term life for your kids. They usually must be at least 14 days old, and coverage ends at 21 or 25. Source

Chronic illness rider

A rider that pays part of the death benefit early if you are chronically ill. Under IRS rules, that means a health care worker certifies you can't do two daily tasks, like eating or bathing, for at least 90 days without help. Source

Contestability period

The first two years of a policy. If you die in this time, the company can review your application and deny the claim if you gave wrong information. Source

Contingent beneficiary

A backup beneficiary. They get the money if your primary beneficiary can't be found. Source

Conversion from group

Switching your group life to your own permanent policy when group coverage ends. It will probably cost much more. Source

Conversion privilege

The right to switch your term policy to a permanent one without a medical exam. Your premium will go up, and there is usually a deadline. Source

D

Decreasing term

Term insurance where the death benefit goes down over the term while the premium stays the same. It is often sold as mortgage protection. Source

Dividend

Money a company may pay back when it collects more than it needs. You only get dividends with a participating policy, and they are not guaranteed. Source

E

Estate

All the money and property a person owns, especially at death. Source

Extended term

An option if you stop paying a cash value policy. Your cash value buys term insurance for a set time. Source

F

Face amount

The amount stated on the policy that will be paid if you die or the policy matures. Source

Final expense

A small policy, also called a burial policy, that covers or prepays funeral costs. Source

Flat extra

Another kind of extra charge added for higher risk. It is listed along with table ratings as a way to charge more. Source

Floor

The lowest credit an index account can get. New York's product rules show index credits of not less than 0. Source

Free look

A short time after you get your policy when you can cancel for any reason and get a full refund. Texas policies give at least 10 to 20 days. Source

G

Grace period

Extra time after your premium is due to pay without losing coverage. Most policies give 31 days. Source

Graded death benefit

A policy that pays less than the full face amount in the early years. The payout grows over time. Source

Group life

Life insurance offered by an employer or group to its members. You usually don't have to answer health questions, and coverage often ends when you leave. Source

Guaranteed issue

A policy for people with health issues who may not qualify for other coverage. Very few people are turned down. Source

Guaranty association

A state group that protects policyholders if their insurance company fails. It pays covered benefits up to limits set by state law. Source

I

ILIT

An irrevocable life insurance trust. The trust owns your policy, so the death benefit is not counted in your estate. Source

Independent agent

An agent who can sell policies from many insurance companies. Source

Indexed universal life

Universal life where the interest you earn follows a stock or bond index, within limits. Your money is not invested directly in the market. Source

Insurable interest

A real reason to want someone to stay alive, either love or money. You need it to buy a policy on someone else. Source

Insured

The person whose life the policy covers. Source

L

Lapse

When your policy ends because you did not pay the premium in time. Your beneficiaries will not get the death benefit. Source

Level term

Term insurance where the death benefit stays the same for the whole term. Source

M

MIB

A company that collects information about medical conditions and risky hobbies for life and health insurers. It shares it only with your permission, and you can get a free copy of your file every 12 months. Source

Modified endowment contract

A policy that gets more money paid in during its first 7 years than a federal tax test allows. Tax law then treats money you take out of it differently. Source

N

NAIC

The National Association of Insurance Commissioners. It is the standard setting group made and run by the top insurance regulators of each state. Source

O

Owner

The person who owns the policy. They can use the policy values and make changes while the insured is alive. Source

P

Paid up additions

Extra insurance you buy with your dividends. It is fully paid for when you buy it. Source

Paramedical exam

A health exam some companies require when you apply. It can come with blood, urine, or saliva tests. Source

Participating policy

A policy where the company shares part of its extra money with policy owners as dividends. Source

Participation rate

The share of an index's gain that gets credited to you. With a 75 percent rate, you get 75 percent of the index's gain. Source

Policy illustration

A chart from the company that shows how a policy might work over the years. It shows what is guaranteed and what is not. Source

Policy loan

Money you borrow from your policy's cash value. If you do not pay it back with interest, it is taken out of the death benefit. Source

Portability

An option to keep group life coverage that would otherwise end, like when you leave a job. It is offered in addition to conversion. Source

Preferred rate class

A risk class name a company may use when it quotes a price, such as "Preferred, non smoking." The class you get changes your premium. Source

Premium

The amount you pay an insurance company for your policy. Source

Preneed

Insurance that lets you pay for your funeral ahead of time. It pays the funeral provider you choose and can lock in today's prices. Source

Probate

The court process for passing on a person's property after they die. Source

R

Rating class

The group a company puts you in to set your price. It is based on things like age, job, sex, and health. Source

Reduced paid up

An option if you stop paying a cash value policy. You keep a smaller death benefit and owe no more premiums. Source

Reinstatement

Bringing a lapsed policy back. You usually pay the past due premium with interest and may need to answer health questions. Source

Return of premium

A term policy that refunds all your premiums if you are still alive at the end of the term. It costs much more than plain term. Source

Rider

An add on to a policy that changes what it covers. It can add benefits, lower them, or leave some things out. Source

S

SGLI

Servicemembers' Group Life Insurance. Low cost term life for eligible service members, up to $500,000. Source

Simplified issue

A policy with a short application and limited health information. It usually costs less than guaranteed issue, but more than fully underwritten coverage. Source

Suicide clause

In the first two years, companies usually will not pay the death benefit if the cause of death is suicide. The company returns the premiums instead. Source

Surrender charge

A fee you pay for canceling a policy or contract early. Source

Surrender value

The cash you get if you cancel your policy early. Charges and any loans are taken out first. Source

T

Table rating

An extra charge for people the company sees as higher risk. Policies can use a table rating, a flat extra, or both. Source

U

Underwriting

How a company decides whether to sell you a policy and what to charge. It may include a medical exam and questions about your health, job, and habits. Source

Universal life

Permanent life insurance with flexible premiums and a cash value. If the cash value runs out, the policy can lapse. Source

V

VALife

Veterans Affairs Life Insurance. Whole life coverage up to $40,000 for veterans with a service connected disability, with guaranteed acceptance. Source

Variable life

Life insurance with a cash value that goes up or down based on investments you pick, usually mutual funds. You can lose money. Source

VGLI

Veterans' Group Life Insurance. It lets you keep coverage after you leave the military, from $10,000 to $500,000, as long as you pay. Source

W

Waiver of premium

A rider that pays your premiums if you become disabled. You usually must be disabled for at least 6 months. Source

Whole life

Permanent insurance that lasts your whole life as long as you pay. Premiums, death benefit, and cash value are guaranteed. Source