Life insurance isn’t a simple topic and confusing life insurance lingo doesn’t help. Confusing language often prevents people from making important and necessary decisions. According to a 2014 study by consulting firm Maddock Douglas and LIMRA, a financial research group, there are about 19 million people who want to buy life insurance but can’t understand the confusing terminology. Additionally, those who do buy life insurance don’t necessarily understand what they have just purchased. Lucky for us, the Department Of Financial Services has provided us with these easy to understand explanations:
- Policy owner: This is the person who has bought the policy. They are in control of it. It’s important to note, however, that the policy owner may or may not be the one whose life is insured. For example, a husband could own a policy on his wife. The policy owner is the only one who can change the beneficiary and get policy details from the insurer.
- Premium: The amount of money that you pay for life insurance. This is generally quoted per month or per year.
- Beneficiary: The person who receives the payout from the life insurance policy. There may be more than one beneficiary named. A specific percentage of the payout can be designated for each beneficiary.
- Death benefit: The amount on a life insurance policy that is payable to the beneficiary when the insured person passes away.
- Insured person: The person whose life is being insured.
- Term life insurance: This type of policy lasts for a specific number of years, which you select.
- Permanent life insurance: This type of policy lasts for your entire life. It also has a cash value component. There are multiple varieties of permanent life insurance including, but not limited to, whole life, universal life, variable life, and variable universal life. Be sure that you understand the difference between permanent and term life and to work with a financial advisor if you choose to buy permanent life insurance.
- Cash value: When you buy a permanent life insurance policy, part of your payment goes into a “cash value” account that grows in value over time. You can take a loan against the cash value and use the money for anything you’d like.
- Accelerated death benefit: If you are terminally ill, this policy feature allows you to receive some of the insurance payout early. Some insurers now call this a “living benefit.” Make sure your policy has it, it is usually a free feature.
- Rider: A rider is an add-on that provides an additional feature or coverage to your policy at an extra cost. There are many different types of riders. It is helpful to look into some options before deciding to buy a policy.
- Underwriting: This is a process that insurance companies use to evaluate the risk of insuring you and determine your life insurance rate. They often look at your medical records, driving record, and prescription drug history.
These terms are just a few that will help you understand life insurance. It’s imperative that you understand all of these terms before you purchase a policy. If possible you should invest in a financial advisor to help you. When it comes time for you to buy a policy make sure that you know exactly what you are buying. Do research and ask questions. Don’t stay in the dark. Buying life insurance is an important thing to do, but ensure that you are smart about it!