Understanding Life Insurance: Key Terms and Concepts

Life insurance is a crucial financial tool that can provide peace of mind and financial security for your loved ones after your death. It can also offer certain financial benefits while you’re still alive. However, not all life insurance policies are created equal. Each type has its own payment structures, features, benefits, and potential add-ons. Understanding these can help you choose a policy that fits your needs and budget. Here, we break down some of the most common terms you’ll encounter when shopping for life insurance.

1. Annuity

Typically, the death benefit from a life insurance policy is paid out in a lump sum. However, beneficiaries may have the option to select an annuity payment instead. This means the death benefit is converted into an annuity, and the beneficiary receives payments for life or for a specific period, while the principal earns interest.

2. Beneficiary

A life insurance beneficiary is the person who receives the payout from the policy after the policyholder’s death. This is often a family member, such as a spouse or child, but the policyholder can name anyone as the beneficiary.

3. Cash Value

Some life insurance policies have a cash value that you can use during your lifetime. You may be able to borrow against the policy, withdraw money to pay for expenses, or use the value to cover the premium for the policy. Some policies also have a cash surrender value, allowing you to receive a lump sum in exchange for terminating your policy. Note that you may need to pay a surrender fee if you choose to terminate your policy.

4. Claim

Your beneficiary must file a claim with the insurer to collect the death benefit from a life insurance policy. They should contact your insurance agent or insurance company to file a claim. They must provide a certified copy of the policyholder’s death certificate and may need to complete additional forms provided by the insurer.

5. Free Look Period

The free look period is the time after purchasing coverage when you can cancel the policy and receive a complete refund. Free look periods vary by state and the type of policy you have but usually range from 10 to 30 days.

6. Permanent Life Insurance

Most permanent life insurance policies have two components: a death benefit and cash value, similar to a savings account. Unlike term life insurance, which is active for a specific amount of time, permanent life insurance expires when the policyholder dies or stops making payments.

7. Premium

The premium is the price you pay for life insurance coverage. Insurance companies determine the cost of life insurance based on multiple factors, including your age, medical history, tobacco use, gender, and more. Depending on the policy, you may be able to pay your premiums monthly, quarterly, semiannually, or annually.

8. Quote

When shopping for life insurance coverage, you’ll receive a quote from the insurance company. This quote will explain how much the policy would cost based on your personal information and level of coverage. You must pay this amount to obtain coverage if you decide to purchase the policy. Quotes will also include policy limits and other key information about your coverage you can use to compare policies.

9. Rider

A life insurance rider is an optional amendment you can add to your base policy that provides additional benefits. For example, a life insurance rider might provide the ability to access your death benefit while alive if you’re affected by a critical illness or disability. Riders vary by provider, may not be available on all life insurance policies, and are usually available for a separate fee.

10. Settlement

A life insurance settlement is the amount paid to your beneficiaries after your death. It may be paid out in a lump sum or installments over time.

11. Term

When you purchase term life insurance, you must select the length of time the policy will be active. This is known as the term. Available terms may vary by insurer but typically range from one to 30 years.

12. Term Life Insurance

With term life insurance, you pay a premium for a set amount of time, known as the policy term. If you die while the policy is active, the life insurance company pays the death benefit to the named beneficiary. Term life insurance doesn’t have a cash value you can tap while alive.

13. Universal Life Insurance

Universal life insurance is a type of permanent life insurance policy. It has two components: a death benefit and a cash value account that earns interest, which grows tax-deferred. With universal life insurance, you can change the policy’s death benefit after purchasing a policy if you meet the necessary requirements. You may also be able to adjust your premium payments based on the value of the cash account. However, using funds from the cash account to pay your premiums could cause your policy to lapse if the balance gets too low.

14. Waiting Period

The waiting period is the time between when you apply for a policy and when your coverage is effective—if your application is approved. During this time, the insurance company will usually review your medical history and other information to determine your eligibility and premium. Insurers may also require a medical exam, but no-exam coverage exists. The process can take several weeks.

15. Whole Life Insurance

Whole life insurance is a type of permanent life insurance. It has fixed premiums, a guaranteed death benefit, and a cash account you can use during your lifetime.

The Bottom Line

Life insurance can help protect your loved ones’ financial health after your death. However, if you don’t understand the ins and outs of your policy, it may not provide the protection you expect. If you have questions, ask your insurance agent or the life insurance company.

Before purchasing a policy, it’s a good idea to get a copy of your credit report for free because your credit history may affect the price you pay.

For any mortgage service needs, feel free to contact O1ne Mortgage at 213-732-3074. Our team of experts is here to help you navigate the complexities of life insurance and ensure you get the best coverage for your needs.