Even at the best of times, understanding life insurance can be a tricky undertaking. It can be so confusing that a lot of people avoid the topic altogether. Consequently, people live without important coverage designed to protect them from grave financial loss.
Do not let field terminology hold you back! Once you are familiar with common life insurance terms, utilizing it as a financial planning tool gets much easier. Here are ten life insurance terms (made simple!) that will help you gain your footing in the industry.
Key Life Insurance Terms
Agent – An agent is a licensed insurance expert. Their job is to educate their clients about the insurance industry and advocate for their needs with insurance companies. An agent can be independent and represent more than one company, or they may only sell policies for one carrier. Sometimes, the words agent and broker are used interchangeably. You can read more about them in this article, where we address the most frequent questions people ask about life insurance agents.
Application – An application is the information form a person fills out to apply for life insurance. The form gets sent to an insurance carrier as a bid for a policy. The provided answers help the insurance company assess the financial risk of covering the applicant and set an appropriate rate for their services.
Beneficiary – The beneficiary is the individual who will receive money from the insurance company if the insured person (usually the family breadwinner) passes away. The beneficiary can be the person’s spouse, child, sibling, parent–whomever the insured writes in their policy’s terms. A single policy can have multiple beneficiaries, but they must split the money between them.
Cash Surrender Value – Cash surrender value is the money a person may receive if they choose to cancel their life insurance coverage before their term ends. The amount is available in cash upon the voluntary end of a policy. This scenario would happen before it becomes payable by death or maturity. Additionally, receiving money back is only an option with certain plans, so it’s good to be aware of this benefit before signing up for life insurance.
Face Amount – The face amount is the amount of money the insurance company will pay to beneficiaries at the death of the insured person (or at the maturity of the policy). Sometimes referred to as the policy’s “death benefit.”
Policy – The policy is the printed legal document stating the terms of the insurance plan issued by the insurance company.
Premium – The premium is the regularly occurring payment the policy owner pays to keep their coverage active (similar to a utility bill or subscription service). A series of regular payments could be annually, semi-annually, quarterly, or monthly. While having a series of payments due throughout the year is the most common, there also is something called a “single-premium” plan. This option is for anyone who wants to avoid the hassle of paying on a schedule and has enough money to pay a significant amount upfront.
Rider – A rider is an optional add-on to an insurance policy that modifies or adds coverage. Generally, riders customize your life insurance plan, so they suit your family, story, and goals more specifically.
Underwriting – Underwriting is the process in which an insurance company categorizes, analyzes, and later accepts or denies an application for life insurance. Furthermore, this process helps the company determine the policyholder’s premium. Here’s a brief video breaking down the underwriting process.
Life Insurance Questions?
We hope that this information on key life insurance terms has been useful to you.
If you’d like to learn how we can help you plan your retirement, call Empower Brokerage at (888) 539-1633 to speak to one of our Life and Annuity experts or leave a comment down below.
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Article updated on 11/27/24.