Life Insurance Glossary: Your Easy Guide to Understanding Policies
Understanding different types of life insurance can be easier when you know the key terms. Here’s a simple glossary to help you:
Index Universal Life (IUL) Insurance Terms
Index Universal Life (IUL) Insurance – A type of permanent life insurance that builds cash value based on stock market index performance, like the S&P 500, while providing a death benefit to your beneficiaries.
Death Benefit – The money paid to your loved ones (beneficiaries) when you pass away.
Premium – The money you pay to keep your policy active. You can choose how much to pay within certain limits.
Cash Value – A savings portion of your policy that can grow over time and be used for loans or withdrawals.
Index Account – The part of your policy where your cash value earns interest based on stock market index performance.
Fixed Account – An option within your policy that earns a steady, guaranteed interest rate instead of being linked to the stock market.
Deposit Fund Account – A separate account that allows you to contribute additional funds beyond your premium payments, which earns a fixed interest rate and can be used to cover future policy costs or withdrawals.
Cap Rate – The highest percentage of interest your policy can earn in an index account, even if the stock market performs better.
Floor Rate – The minimum interest rate your policy will earn, even if the stock market drops.
Participation Rate – The percentage of the stock market’s gains that are credited to your policy’s cash value.
Policy Loan – Money you can borrow from your cash value. It’s a loan against your policy that you must repay with interest.
Withdrawal – Taking money from your policy’s cash value. Unlike a loan, withdrawals don’t have to be paid back, but they reduce the policy’s value.
Surrender Charge – A fee you pay if you cancel your policy early, usually within the first 10-15 years.
Cost of Insurance (COI) – The amount deducted from your policy to cover the death benefit and administrative costs.
No-Lapse Guarantee – A feature that keeps your policy active even if your cash value drops too low, as long as you meet certain conditions.
Whole Life Insurance Terms
Whole Life Insurance – A type of permanent life insurance that provides lifelong coverage with guaranteed cash value growth and fixed premiums.
Guaranteed Cash Value – The portion of your policy that accumulates savings on a tax-deferred basis, growing at a guaranteed rate set by the insurer.
Dividends – Some whole life policies pay dividends based on the insurance company’s financial performance. These can be used to buy additional coverage, lower premiums, or be taken as cash.
Paid-Up Additions – Extra life insurance coverage that you can purchase with dividends to increase your death benefit and cash value.
Modified Whole Life – A whole life policy with lower premiums in the early years and higher premiums later.
Limited Pay Whole Life – A policy where premiums are only paid for a set number of years, but coverage lasts for life.
Variable Universal Life (VUL) Insurance Terms
Variable Universal Life (VUL) Insurance – A type of permanent life insurance that allows you to invest the cash value in various investment options, such as mutual funds, while also offering flexible premiums and a death benefit.
Investment Subaccounts – The different investment options available within a VUL policy, allowing policyholders to allocate their cash value among stocks, bonds, and money market funds.
Market Risk – Since the cash value in a VUL policy is tied to investments, it can go up or down depending on market performance.
Flexible Premiums – A feature that allows policyholders to adjust how much they pay in premiums, as long as the policy has enough cash value to cover costs.
Securities-Based Policy – A VUL policy is considered a security and is regulated by financial authorities because of its investment component.
Term Life Insurance Terms
Term Life Insurance – A type of life insurance that provides coverage for a specific period (such as 10, 20, or 30 years) and pays a death benefit if the insured passes away during that term.
Level Term – A term life policy where the premiums and death benefit remain the same throughout the policy term.
Decreasing Term – A term life policy where the death benefit decreases over time, often used for mortgage protection.
Convertible Term – A policy that allows you to convert your term life insurance into a permanent policy without a medical exam.
Renewable Term – A policy that can be renewed at the end of the term without a medical exam, though premiums typically increase.
Return of Premium (ROP) Term – A type of term life insurance where you receive a refund of all paid premiums if you outlive the policy term.
Common Riders in Life Insurance Policies
Accelerated Death Benefit Rider – Allows you to access a portion of your death benefit if you are diagnosed with a terminal illness.
Chronic Illness Rider – Provides access to part of your death benefit if you develop a chronic illness that affects daily living activities.
Critical Illness Rider – Offers a lump sum payment if you are diagnosed with a covered critical illness, such as heart attack or cancer.
Long-Term Care (LTC) Rider – Helps cover the costs of long-term care services if you become unable to care for yourself.
Disability Waiver of Premium Rider – Waives your premium payments if you become totally disabled and unable to work.
Child Term Rider – Provides life insurance coverage for your children under your policy.
Guaranteed Insurability Rider – Allows you to purchase additional coverage in the future without undergoing a medical exam.
Return of Premium Rider – Ensures that if you pass away, your beneficiaries receive not only the death benefit but also the total amount of premiums paid.
Accidental Death Benefit Rider – Provides extra money to your beneficiaries if you pass away due to an accident.
Term Insurance Rider – Adds temporary life insurance coverage to your policy for a set period.
General Life Insurance Terms
Underwriting – The process insurers use to evaluate risk and determine your policy eligibility and premium rates.
Free Look Period – A period (usually 10-30 days) after purchasing a policy where you can cancel and receive a full refund.
Grace Period – Extra time (often 30-60 days) given after a missed premium payment before the policy lapses.
Lapse – When a policy is terminated due to unpaid premiums.
Beneficiary – The person or people who will receive the death benefit when the insured passes away.
Contingent Beneficiary – The backup beneficiary who receives the death benefit if the primary beneficiary is no longer alive.
Reinstatement – The process of restoring a lapsed policy by paying overdue premiums and possibly undergoing medical underwriting.
Contestability Period – A time frame (usually two years) during which an insurer can investigate claims for fraud or misrepresentation.
Suicide Clause – A provision stating that the policy will not pay the death benefit if the insured dies by suicide within the first two years.
Insurability – A person’s ability to qualify for life insurance based on their health, lifestyle, and other factors.
