Life Insurance Defined: 12 Terms You Need to Know

Shopping for life insurance can be tricky. Knowing how much you need, how long you need it, and how much you should be paying is virtually impossible without a basic understanding of certain key terms. The following 12 definitions will help you make an informed decision about what kind of life insurance policy to buy for your particular needs.

Life Insurance Quote

An estimate of how much you’ll have to pay for a particular life insurance policy. Most quotes come in the form of a monthly cost, but they can also represent an annual rate. Since different insurance providers charge different rates for the same types of coverage, quotes tend to vary from company to company. Since quotes are based on a limited amount of personal information and subject to the insurance provider’s approval, they should never be mistaken for a final price. The more information you provide about your lifestyle and family health history, the more accurate your quote will be.

Term Life Insurance

Life insurance that provides protection for a specified period of time. Because term life insurance doesn’t provide a lifetime of coverage or build up any cash value, it is generally more affordable than permanent life insurance. Term periods typically range from 10 to 30 years and go up in five-year increments (e.g., 10 years, 15 years, 20 years, 25 years, 30 years).

Permanent Life Insurance

Life insurance that provides protection for the policyholder’s entire lifetime. The two main types of permanent life insurance are whole life insurance and universal life insurance. Because permanent life insurance provides a lifetime of coverage and accumulates cash values that may be used while the policyholder is still living, it is far more expensive than term life insurance.

Whole Life Insurance

One of the two main types of permanent life insurance, whole life insurance provides coverage for the policyholder’s entire lifetime at a set cost. Because part of your insurance money is placed in a high-interest bank account, the cash value of your policy increases on a tax-deferred basis every time you make an insurance payment. With a whole life policy, you can borrow against your cash value or “cash out” your policy by surrendering it prior to your death.

Universal Life Insurance

The other main type of permanent life insurance, universal life insurance offers more flexibility than whole life insurance. With a universal life policy, you can increase or decrease your death benefit at any time. And after your first premium is paid, you have the liberty to pay your premiums at any time and in any amount (although certain restrictions apply).

Convertible Term Life Insurance

Term life coverage that gives the policyholder the right to convert the policy to a permanent insurance plan without providing evidence of insurability. The policyholder cannot be denied coverage or charged an extra premium for conditions that manifested themselves since the original policy was issued. Certain time and age restrictions apply.

Group Life Insurance

Life insurance provided by an employer, union or other groups where all insured parties receive the same amount of coverage at the same price, regardless of discrepancies in health or lifestyle.

  • Coverage. The scope of protection provided by an insurance policy – i.e., how much a policy is worth, and how long it will remain active. Coverage amounts can range from several thousand to several million dollars, while coverage periods can range from 10 years to a lifetime.
  • Premium. The dollar amount paid for an insurance policy. Premiums can be calculated on a daily, monthly or annual basis.
  • Claim. A formal request for payment related to an event or situation that is covered by a life insurance policy (i.e., the policyholder’s death).
  • Death Benefit. The amount of money that will be paid to the beneficiary when the insured dies.

A.M. Best Rating

A.M. Best is the top life insurance rating provider in the country. All life insurance companies receive a rating from A.M. Best based on their financial strength and ability to pay claims. When rating a life insurance company, A.M. Best evaluates overall operating performance, asset quality, financial flexibility, and capitalization. Companies with higher grades (A- to A++) are the most likely to pay when you file a claim.
Hopefully, these definitions will help you get a better idea of what you’re looking for in a life insurance policy. If you’re still confused, we recommend speaking to a licensed life insurance agent.

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