Shopping for life insurance often means running into words that are not part of everyday conversation. Terms like contestable clause, rider, or face amount can make a policy feel more complicated than it needs to be. Below is a plain language guide to many of the words you are likely to come across while reviewing a term life insurance policy or application. Keep in mind that exact numbers, time periods, and rules can vary by insurer and can change over time, so always confirm current details for any policy you are considering.
People and Roles in a Policy
Several terms describe who is involved in a life insurance contract and who benefits from it.
- Insured: the person whose life is covered. When this person passes away, the policy pays a death benefit.
- Insurer: the insurance company responsible for paying the death benefit.
- Beneficiary: the person or people named to receive the death benefit. A primary beneficiary is first in line, while a contingent beneficiary receives the benefit if the primary beneficiary is no longer living.
- Owner: the person who controls the policy, including the right to change beneficiaries or cancel coverage. The owner is not always the same person as the insured.
- Underwriter: the person at the insurance company who reviews an application and decides how a risk should be classified and priced.
- Revocable and irrevocable beneficiary: a revocable beneficiary can be changed by the owner at any time, while an irrevocable beneficiary must agree to any change.
How Coverage Works
These terms describe the mechanics of how a term policy is built and how it behaves over time.
- Face amount: the death benefit amount stated in the policy.
- Level term: a policy where the death benefit and premium stay the same for a set number of years, often offered in common blocks such as ten, twenty, or thirty years.
- Decreasing term: a policy where the death benefit gradually declines over the term, now rarely sold since level term options are generally more cost effective.
- Renewable term: a policy that can continue for another term without needing to prove insurability again, though premiums often rise at renewal.
- Convertible: a feature that allows a term policy to be exchanged for a permanent policy without new medical underwriting.
- Expiry: the date a term policy's coverage period ends.
- Lapsed policy: a policy that has ended because premiums were not paid.
Riders and Added Benefits
Riders are optional additions that change or expand what a policy covers. Availability and details vary by company and by state.
- Accidental death benefit: an added payout if death results from an accident, available for an additional cost and subject to its own limits.
- Accelerated death benefit (living benefits): allows access to some policy proceeds while the insured is still living, typically in cases of serious or terminal illness.
- Waiver of premium: continues coverage without requiring premium payments under certain qualifying circumstances, such as disability.
- Children's term rider: adds a modest amount of term coverage on an insured's children under one flat premium.
Underwriting and Application Terms
Before a policy is issued, the insurer gathers information to decide how to classify and price the risk.
- Evidence of insurability: medical and personal information used to evaluate an application.
- Examination: a medical exam that may be required as part of applying.
- Nonmedical: an application process that relies on health questions rather than a physical exam.
- Standard and preferred risk: classifications based on health and lifestyle that help determine premium rates. Some insurers offer multiple tiers within preferred classifications.
- Rated policy: a policy issued at a higher premium due to a health condition or other risk factor.
- Contestable clause: a provision allowing the insurer to review and potentially contest a claim during an early period of the policy, often based on information given in the application.
- Free look period: a window of time after a policy is issued during which the owner can cancel it and receive a refund of premium paid.
Business and Estate Related Terms
Life insurance is also used in business planning. These terms often come up for small business owners and partners.
- Key person insurance: coverage on an essential employee, owned by and payable to the business if that person passes away.
- Buy-sell agreement: an agreement among business owners that uses life or disability insurance to fund the purchase of a departing or deceased owner's share.
- Cross purchase and entity agreements: two common structures for funding a buy-sell agreement, differing in who owns and pays for the policies.
- Collateral assignment: using a policy as security for a loan, so a lender receives only the amount owed if the insured dies.
A Note on This Glossary
This glossary is intended as general educational information, not tax, legal, or financial advice. Specific policy features, dollar limits, time frames, and rules differ from one insurance company to another and can change. If you are reviewing a quote or an existing policy and want to understand exactly how these terms apply to your coverage, it helps to ask questions before you sign anything.
If any of these terms come up while you are reviewing a life insurance quote or an existing policy, the team at Flynn Insurance Agency in Kings Park is glad to walk through them with you and help you understand your options.
This article is general information, not legal, tax or financial advice. Coverage depends on the terms, conditions and exclusions of each policy. Talk with a licensed agent about your situation.
