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Life Insurance Definitions You Need to Know
According to the 2020 Insurance Barometer Study by LIMRA, 54% of Americans own life insurance, and 36% of Americans say they intend to purchase coverage in the next 12 months. This guide explains common life insurance terms to help you navigate and choose the best life insurance.
What is life insurance?
Life insurance is a policy that pays a death benefit to the policyholder’s beneficiary. There are a few types of life insurance, including whole life and term life insurance. With some types, like whole life, the policyholder may be able to draw out funds from the policy while they’re still alive.
Why would you consider getting a life insurance policy? If you’re the breadwinner of the family or have outstanding debts, a life insurance policy helps cover your loss. The policy can keep your significant other or children afloat. It can be used to pay the debts you’ve left behind, like a college loan or credit card debt. Life insurance can also be used to cover funeral and final expenses.
Term life insurance vs. whole life insurance
Term life insurance is a policy that lasts a certain amount of time. If the policyholder passes away during that time, the death benefit will be paid out. If the term expires while the policyholder is still alive, no benefit is paid out.
Whole life insurance is a permanent life insurance policy that covers you for the duration of your life. As you pay your premiums, the policy builds up “cash value,” which is money that’s set aside from your payments. You’re able to borrow against the cash value, which can help supplement retirement savings or cover you if you need money for emergency expenses.
Life insurance definitions
Accelerated death benefits: Accelerated death benefits may be available when a policyholder becomes terminally or chronically ill. These benefits can cover end of life costs and will decrease the death benefit amount.
Accidental death insurance: Accidental death insurance is a policy that covers the policyholder if they’re killed in a covered accident. Some policies will also payout if the policyholder is seriously injured in a covered accident.
Face amount: The face amount is the dollar amount of the death benefit paid out when the insured person passes on.
Beneficiary: A life insurance beneficiary is a person that’s paid the death benefits. Policyholders may name one or several beneficiaries.
Cost of insurance: Cost of insurance are charges for administration and other expenses the life insurance company incurs.
[ Read: How Much Does Life Insurance Cost? ]
Coverage period: The coverage period is the length of time in which life insurance benefits may be paid out.
Evidence of insurability: Some life insurance plans require a health examination to determine coverage. Evidence of insurability is the health information a life insurance applicant provides to the insurance provider.
Grace period: Some insurance providers will offer a grace period on payments. If you’re late on a payment, you’ll have a certain amount of time to pay your premium in order for the coverage not to lapse. If the grace period expires, you may lose your life insurance coverage.
Insurance policy: A life insurance policy is the contract you have with the life insurance provider, which includes premiums the policyholder must make to be eligible for benefits.
Lifetime coverage: Lifetime coverage in a life insurance policy lasts the policyholder’s entire life. There is a death benefit, as well as a savings component through the cash value part of the policy. This may be accessed while the policyholder is still alive.
Owner: The owner of a life insurance policy is the person who owns and controls the policy. Often, this is the person whose life is insured. In some cases, the owner may also be the beneficiary, such as a parent buying life insurance for a child, or another party, like a trust.
Permanent life insurance: Permanent life insurance encompasses life insurance types that don’t expire, including whole life insurance and universal life insurance. Permanent life insurance combines both a death benefit with cash value savings.
Policy: The policy is the terms of the life insurance contract between the provider and the insured.
Premium: The life insurance premium is the amount of money the policyholder pays to keep a life insurance policy active.
Rider: Life insurance riders are additional benefits that can be added to a life insurance policy. Life insurance riders may also amend the terms of a life insurance policy.
Term life insurance: Term life insurance is a life insurance policy that lasts a specific amount of time, typically 10 to 30 years. Term life insurance provides death benefit coverage during the term. When the term ends, the policy expires.
Universal life insurance: Universal life insurance is a permanent life insurance policy that enables the policyholder to increase or decrease the premium amount over time.
Whole life insurance: Whole life insurance is a permanent life insurance policy with premiums that stay the same over time.
[ Read: Best Term Life Insurance for 2020 ]
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