Decoding Life Insurance - Important Terms to Know

Behind the Veil

Let's face it, shopping for life insurance can be difficult. First of all, its not a fun conversation. No one wants to spend much time thinking about the position their loved ones would be in should something unexpected happen. On top of that, there are a LOT of insurance companies out there and almost unlimited options for if you are in relatively good health.

But let's say you move past that and decide to speak to a financial advisor. The first thing you'll realize is that there are a lot of terms that you have never heard before wrapped up in a contract that can be really tough to understand. Hopefully you've found an excellent advisor that will take the time to walk you through the finer points of the policy. Even if that is the case you may still find yourself nodding and smiling without sound understanding of the coverage you are about to purchase. This mini series is dedicated to making shopping for life insurance a little easier. Today we are going to focus on some of the commonly used terms that you should understand before making a purchase.

Terms

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Accelerated Death Benefits - The accelerated death benefits often come as an included "rider" (more on those later) in a life insurance policy. It can also be referred to as a living benefit. That is because this benefit allows you to have access to a portion of the total amount of coverage, before you die. For example, if you were to come down with a chronic, critical, or terminal illness, you could "accelerate" a portion of your coverage to use for surgeries or treatments.

Beneficiary - Here's one you may have heard before, but there's nothing wrong with a little review. The beneficiary is the person you select to receive the proceeds from your policy. Beneficiaries are most often family members like a spouse or child but you could also name a business partner or even a charity as the beneficiary of you policy.

Cash Surrender Value - If you have a policy that builds cash value, this is the amount of cash you would get if you voluntarily terminate coverage before the policy has been paid out. The policy would no longer be in force.

Death Benefit - This is the amount of money paid to the beneficiary when the policyholder dies. Also known as the face amount.

Disability Waiver of Premium - A common option you can add on to a policy. This condition states that the life insurance company will not require the insured to pay their monthly premium payment if the insured person becomes disabled. The definition of disability may vary from policy to policy, and policies may vary the length of time the will allow premium payments to be waived. The option to add this waiver to a policy will increase the monthly premium.

Free Look Provision - It is important to note that most every policy comes with an amount of time to look over the policy to make sure you are satisfied with all the terms and conditions. This is known as the free look provision.

Grace Period - The amount of time the policy remains in force after a premium payment has been missed. It is usually 30 days.

Insurable Interest - This states that there is proof that a person who takes out a life insurance policy on someone else has a substantial and lawful or financial interest in that person's wellbeing. It is mandatory when applying for a policy for another person if you are going to be the owner of the policy.

Insured - The person who is insured by a life insurance policy. The death benefit will by made to the person's named beneficiaries.

Insurer - The life insurance company.

Medical Information Bureau (MIB) - when you purchase a life insurance policy you often have to consent to sending your health information to the MIB. The MIB is a non-profit group of life insurance companies that prevents fraud by alerting other member companies. If you had applied for life insurance before and were denied coverage because of a health issue, this would come up in your report. The company you are applying for coverage with would be able to see this if they are a member of the MIB.

Rating - The practice of charging more than the normal rate for a life insurance premium based on greater-than-average risk of death. If you are in great health then you are not at great risk of dying early in the life of the policy. If that is the case, the life insurance company will charge a lower premium. On the other hand if your health is poor, you will be charged a higher premium.

Rider (I told you this would come up again) - A provision of an insurance policy that can be purchased separately as an "add-on" to provide additional benefits beyond what is already included in the policy. Depending on the company you choose, there can be quite a few riders that are included in the policy at no cost, but riders typically increase the monthly premium.

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Underwriting - We'll wrap things up here with underwriting. You may have some familiarity with this term if you have purchased a home. There is underwriting to get approved for a mortgage just like there is for life insurance. Underwriting simply refers to the procedure a life insurance company uses to decide whether or not to insure an applicant, and at what rating. There are many factors that go into this process but it is revolves around three main characteristics: age, health, and gender. We'll do a deeper dive into the underwriting process when we cover "Simplified Issue vs Fully Underwritten".

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If you've made it this far congratulations! You are probably pretty invested in making sure you make the right decision for your family. There are many more terms that you may hear or see when you read through your life insurance policy. There is usually a glossary explaining the terms in your policy packet, but you won't get that until AFTER you've purchased the policy. We hope this will help you on your journey to protecting your family's financial future!

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