Life insurance, in plain English.
Every term we use, defined without the jargon. If a word on this site is unfamiliar, it is probably here.
Benefits and payout
- Accelerated death benefit
A provision that allows an early payout of part of the death benefit if you meet a qualifying condition defined in the contract, such as a terminal or chronic illness. Any amount you accelerate reduces the death benefit later paid to your beneficiary.
- Death benefit
The amount a life insurance policy pays to your beneficiary when the insured person passes away, as long as the policy is in force. Outstanding loans or accelerated benefits can reduce the amount paid.
See alsoBeneficiaryTerm life insuranceWhole life insuranceAccelerated death benefit
- Face amount
The coverage amount stated on the policy, and the starting point for the death benefit. Loans, withdrawals, or accelerated benefits can make the amount actually paid differ from the face amount.
- Graded death benefit
A payout schedule on some simplified issue and guaranteed issue policies that limits the death benefit during the first two to three policy years, often returning premiums plus interest instead. Accidental death is usually covered in full from day one, and the full benefit applies once the graded period ends.
See alsoGuaranteed issueSimplified issueFinal expense insurance
- Living benefits
Policy features that let you access part of the death benefit while you are still living under qualifying conditions, such as a serious illness. Terms, triggers, and amounts vary by carrier and state.
Ratings and terms
- AM Best rating
An independent rating that reflects an insurance carrier’s financial strength and its ability to meet ongoing obligations. Higher grades, such as A or above, signal stronger assessed financial stability.
See alsoUnderwriting
- Contestability period
The first two years of a policy in most states, during which the carrier can review the application for material misstatements before paying a claim. After it ends, claims are generally paid without re-examining the application. Answering every application question accurately keeps this a non-issue.
See alsoUnderwritingDeath benefit
- Convertibility
A term policy feature that lets you convert some or all of your coverage to a permanent policy without new medical underwriting, within the limits the contract sets. Conversion rules and deadlines vary by carrier.
- Filed rate
An insurance price filed with and reviewed by a state insurance department. Because rates are filed, a given policy costs the same whether you buy it through an agent or directly from the carrier.
See alsoPremiumUnderwriting
- Free look period
A window after a new policy is delivered when you can cancel it for a full refund of premium. Every state provides a free-look period, typically 10 to 30 days, and the exact length is stated in your policy documents.
See alsoPremiumSurrender charge
- Guaranty association
A state-run safety net that protects policyholders, within limits set by state law, if a licensed insurance carrier becomes insolvent. Every state has one, funded by the insurers licensed there. Carrier financial strength ratings still matter, because coverage limits vary by state.
See alsoAM Best rating
People and money
- Annuitant
The person whose life an annuity’s income payments are measured against. The annuitant is often the contract owner, but does not have to be.
See alsoAnnuityBeneficiary
- Beneficiary
The person, people, or entity you name to receive the death benefit. You can usually name more than one and update your choices as life changes.
See alsoDeath benefitAnnuity
- Contingent beneficiary
The backup you name to receive the death benefit if every primary beneficiary has passed away or cannot be located. Naming one helps keep the payout from routing through your estate.
See alsoBeneficiaryDeath benefit
- Insurable interest
The legal requirement that the policy owner would suffer a genuine financial or family loss if the insured person died. It exists automatically for yourself, a spouse, and close dependents, and carriers confirm it when a policy is issued.
See alsoBeneficiaryUnderwriting
Products
- Annuity
An insurance contract that converts a sum of money into income, often used for retirement, with options that can provide payments for a set period or for life. Features, fees, and any guarantees depend on the contract and the issuing carrier.
See alsoBeneficiaryPremium
- Final expense insurance
A smaller whole life policy meant to cover end-of-life costs such as a funeral, burial, or remaining bills. It often uses simplified underwriting, which can make it more accessible for older applicants.
See alsoWhole life insuranceSimplified issueGuaranteed issue
- Indexed universal life (IUL)
Permanent coverage whose interest is tied to the performance of a market index, with a floor that limits downside and a cap or participation rate that limits the upside. Values shown in any illustration are projections, not promises, and policy charges apply.
- Term life insurance
Coverage for a set period, such as 10, 20, or 30 years, that pays a death benefit if the insured passes away during that term. It usually has no cash value and tends to cost less than permanent coverage for the same death benefit.
See alsoWhole life insuranceLevel premiumConvertibilityDeath benefit
- Whole life insurance
Permanent coverage designed to last your lifetime, with a level premium and guaranteed cash value that grows on a tax-deferred basis. Some whole life policies may also pay dividends, which are not guaranteed.
Indexed mechanics
- Cap
The maximum interest rate an indexed policy will credit for a given period, even when the underlying index gains more. Caps are set by the carrier and can change over time.
- Floor
A contractual minimum interest rate on an indexed policy, often 0 percent, so a downturn in the index does not directly reduce your credited interest. Policy charges still apply, so account value can decline in a flat year.
- Participation rate
The percentage of an index gain used to calculate the interest credited to an indexed policy. A 100 percent rate counts the full measured gain before any cap is applied.
Policy mechanics
- Cash value
The savings component inside a permanent life policy that can grow over time on a tax-deferred basis. You may be able to borrow against it or withdraw from it, which can reduce the death benefit.
See alsoWhole life insuranceIndexed universal life (IUL)Surrender valueDividendPolicy loan
- Cost of insurance
The internal charge a carrier deducts to provide the death benefit, based on factors such as age, health class, and the amount of coverage at risk. On many permanent policies this charge tends to rise as you age.
See alsoPremiumUnderwritingCash value
- Dividend
A potential annual payment some mutual carriers may share with whole life policyholders, which can be taken as cash, used to reduce premiums, or used to buy more coverage. Dividends are not guaranteed and depend on carrier performance.
See alsoWhole life insuranceCash value
- Grace period
Extra time, commonly around 30 days, to make a missed premium payment before a policy lapses. Coverage generally continues during the grace period, and the exact length is set by the contract and state law.
- Illustration
A document that shows how a policy may perform over time using assumed rates and charges. Non-guaranteed figures are projections, not promises, and actual results will vary.
See alsoIndexed universal life (IUL)Cash valueModified Endowment Contract (MEC)
- Lapse
The end of coverage because premiums stopped and the grace period ran out. Some permanent policies can draw on cash value to delay a lapse, and a lapsed policy may qualify for reinstatement.
A premium that stays the same for a defined period rather than rising each year. It is common on term policies during the level term and on whole life for the life of the policy.
- Modified Endowment Contract (MEC)
A life policy funded faster than federal limits allow, which changes the tax treatment of loans and withdrawals so gains come out first and may be taxable. Whether a policy becomes a MEC depends on how it is funded, and any tax outcome is a projection, not a promise. Ask a tax advisor about your situation.
- Paid-up policy
A permanent policy that no longer requires premium payments while coverage stays in force. Some policies are designed to become paid up after a set number of years, and some let you elect reduced paid-up coverage using the cash value already built.
- Policy loan
A loan you take from the carrier using your policy cash value as collateral. Interest accrues, and any unpaid balance reduces the death benefit and the cash value. On a MEC the tax treatment differs, so figures are projections, not promises.
See alsoCash valueSurrender valueModified Endowment Contract (MEC)
The payment you make to keep a policy in force, typically monthly or annually. The amount depends on the coverage, the product, and your underwriting outcome.
- Reinstatement
Restoring a lapsed policy, typically within a window of three to five years, by paying the back premiums and providing any evidence of insurability the carrier requires. Reinstating is often less costly than starting a new policy at an older age.
See alsoLapseEvidence of insurability
A term life feature that refunds the premiums you paid if you outlive the level term. It costs more than standard term coverage, and the refund is defined by the contract.
See alsoTerm life insurancePremiumRider
- Rider
An optional add-on that changes or extends a policy, sometimes for an extra cost. Common examples include living benefits and a child term rider.
See alsoLiving benefitsAccelerated death benefitConvertibility
- Surrender charge
A fee the carrier deducts if you cancel or withdraw from a policy or annuity during its early years. The charge usually declines on a set schedule until it disappears, and the schedule is stated in the contract.
See alsoSurrender valueAnnuityCash value
- Surrender value
The amount you would receive if you cancel a permanent policy, equal to the cash value minus any surrender charges and outstanding loans. Surrender charges are common in the early policy years.
Underwriting and issue
- Evidence of insurability
The health and lifestyle information a carrier requires before issuing or increasing coverage, ranging from a short questionnaire to a full medical exam. Some contract features, such as term conversion, let you make changes without providing new evidence.
See alsoUnderwritingConvertibility
- Guaranteed issue
Coverage that does not ask health questions and does not require a medical exam, so acceptance is guaranteed within the stated age and amount limits. These policies often carry higher costs and a waiting period before the full death benefit applies.
- Rate class
The pricing category underwriting assigns, such as preferred plus, preferred, standard, or a substandard table rating. Different carriers can place the same person in different classes, which is a core reason to shop more than one carrier.
- Simplified issue
An application process that uses a short health questionnaire and usually no medical exam, often with a faster decision. Approval is still subject to underwriting, and coverage amounts may be more limited than fully underwritten policies.
- Underwriting
The carrier review that sets your eligibility and price based on health, lifestyle, and other factors. Coverage is subject to underwriting approval, and product and carrier availability varies by state.
See alsoPremiumSimplified issueGuaranteed issueCost of insurance
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