Life Insurance Terms Glossary

Choosing a life insurance policy requires a lot of time, energy, and careful thought. Comparing policies and deciding on one is quite a challenge. Understanding the legal and insurance jargon involved, however, can further add to the complexity of this undertaking.

It is paramount that you thoroughly understand what plan you are getting before signing on the dotted line. You need to be an informed consumer if you want to protect yourself and your assets.

This glossary contains life insurance terms and phrases you will commonly encounter in your search for the right life insurance policy. If the term or phrase you are confused about is not on our list, you can reach out to a Safe Wealth Agent for better clarity.

Accidental Death and Dismemberment (AD&D)

A type of insurance that pays out benefits should the insured person die due to an accident, lose a limb, or lose the use and function of specified body parts. Some AD&D contracts specify certain kinds of accidents where the benefits are paid out.

Agent

A state-licensed representative of the insurance provider who sells their policies to clients. They serve as the main liaison between the insurance company and the policyholder.

Annual Renewable Term Life Insurance (ART)

A type of insurance policy that renews each year up until a certain age, regardless of any pre-existing health conditions and other factors. It essentially guarantees the policyholder or insured future insurability for a specified number of years.

Annuity

A type of insurance contract wherein the policyholder receives income payments at set intervals. Annuities are often marketed for retirees as it guarantees a steady fixed income stream. There are four basic types: immediate fixed, immediate variable, deferred fixed, and deferred variable annuities.

Beneficiary

The named individual, individuals, or organization who will receive the payout benefits as stipulated in the insurance contract upon the death of the insured.

Bonus Rate Annuity

A type of deferred fixed annuity product that comes with a higher than normal interest rate during the first year. This is often done to help attract new policyholders.

Broker

A person who represents consumers, acting as an intermediary between them and the insurance company. Brokers help consumers find the policy they need and receive commissions from the insurance company upon each successful sale.

Burial Insurance

A type of guaranteed issue policy that offers a low death benefit for coverage of funeral and insurance expenses. It can either be term or whole life insurance.

Capital Gains Tax

This is a tax paid upon selling any assets, with the charged amount based on the profit made. This is also the tax levied on the total value of an insured’s assets apart from their principal residence upon their death.

Cash Surrender Value

The amount a policy owner will receive should they cancel a permanent life insurance policy. Also called annuity surrender value, it is computed by subtracting outstanding premiums, loans, and surrender charges from the policy’s cash value.

Cash Value

The total amount of money held in the policyholder’s account and builds up or grows in a permanent life insurance policy or a cash-value generating annuity.

Cash Value Life Insurance

A type of permanent life insurance policy that allows policyholders to earn a cash value on top of their death benefit.

Claim

A formal request by the policyholder or the insured for benefit payment or compensation following the terms of the policy agreement.

Contestability Period

This refers to the first two years after purchasing a life insurance policy. During this time, if the insured dies, the insurance provider may contest, investigate, and potentially deny claims to pay the death benefits.

Convertible Term Life Insurance

A type of term life insurance policy that may be converted into permanent life insurance. This can be done without any medical assessments and the insurer is required to renew the policy no matter the insured’s health condition.

Credit Life Insurance

A type of life insurance policy that pays off any outstanding debts should the borrower (also the policyholder) die. This is often used to help pay large loans like mortgages or car loans.

Death Benefit

The sum of money that insurers agree to pay to the nominated beneficiaries in the event that the policy owner or the insured dies.

Direct Response

This refers to when an insurance company makes a direct policy sale through their own employee, via mail, or over the counter.

Disclosure Statement

A formal document that provides an explanation and comparison of an insurance policy. This is provided to consumers, especially individuals who may be considering replacing their current policy with another.

Dividend

This refers to the funds paid out or returned to the policyholder. The amount paid is based on the company’s overall financial performance, investment returns, new policies sold, and interest rates. The total amount also depends on the total premiums the policyholder paid.

Exclusions

This refers to conditions or provisions that are not included in the insurance contract. It essentially refers to risks that the insurance company will not insure or cover under your policy.

Face Amount

The total amount of the insurance that the policyholder purchases or the stated value of the policy. This is also the sum that will be paid in case the insured dies or upon maturity of their policy.

Free Look Provision

This refers to the limited amount of time an insured can review their policy then return or cancel it and still receive a full refund. This starts from the day the policyholder receives the policy and lasts between 10 to 30 days.

Grace Period

This refers to the limited time that policy owners have to make late payments without losing their insurance coverage. This usually starts right after their premium due date and lasts for about a month.

Group Life Insurance

This is a type of life insurance policy offered through a group, such as an employer or any other professional association.

Insurable Interest

This is one of the requirements for taking out a life insurance policy on somebody else. It means that should the insured die, the policy owner will suffer or experience financial loss — and so has a veritable interest in keeping the insured alive.

Insured

The individual or party covered by the life insurance policy. In many cases, the insured is also the policyholder, though it’s possible for it to be a loved one or family member instead.

Irrevocable Beneficiary

A named beneficiary that receives full rights to the funds of the life insurance policy. They cannot be changed or revoked even by the policy owner, unless the beneficiary themselves agree to a forfeiture.

Lapse Rate

This refers to the rate that a life insurance policy will be terminated due to the policyholder’s failure to make premium payments.

Living Benefits

The partial benefits or advance payment that the insured may receive while they are still alive. It can be used as financial assistance, though some policies only offer this for those with terminal illnesses.

Non-Forfeiture Clause

An insurance policy clause that states the insured or policyholder will receive either full or partial benefits or a partial refund of premiums after missing payments and the policy lapses.

Policy Proceeds

The total amount that the policy pays out upon death of the policy owner or when they receive payment upon maturity or surrender of the policy.

Policy owner or Policyholder

The person who bought the insurance policy from the company. Oftentimes, this is the same as the insured, though it can be a loved one or family member.

Premium

The payment or series of regular payments made towards funding the insurance policy and ensuring it remains in effect. It can often be paid annually, quarterly, monthly, or as agreed upon with the insurers.

Reinstatement

This refers to the restoration of a policy after it has already lapsed due to missed premium payments.

Rider

Any provisions the insured or policy owner may purchase as an add-on to expand the coverage of their original policy.

Settlement Options

Refers to the other ways that the policyholder or beneficiary can choose to receive their payouts or policy benefits.

Standard Risk

Risk classified as normal or fits well within expected physical, occupational, and other standards.

Substandard Risk

Risk classified as above average due to the individual’s failure to meet policy requirements. This results in higher premium payments.

Term Life Insurance

This is a type of life insurance policy that gives a tax-free death benefit to beneficiaries provided that the insured dies within a specific term or time frame. Also known as pure life insurance, this policy typically only covers a number of years per term, though it can be renewed.

Term to 100

A type of permanent life insurance policy wherein the coverage lasts for as long as the insured is alive. It offers guaranteed premiums which are paid until the insured reaches 100 years old. However, there is typically no cash value for this type of policy.

Universal Life Insurance 

A type of permanent life insurance policy that offers an investment savings element (cash value) and low premiums. This type of policy often offers greater flexibility than whole life insurance as the policy owner can adjust their death benefits or premiums.

Whole Life Insurance

This is a type of permanent life insurance policy that lasts throughout the insured’s life and provides permanent death benefit coverage. Similar to universal life insurance, this also has a cash value or savings element but its premiums are fixed.