Have you ever been in a conversation where you found yourself wondering what a word or phrase means yet pretending you knew the meaning because you were too embarrassed to ask? I’ve been there. And everyone else has, too.
Nobody likes to appear uneducated or uninformed.
While faking it in some situations may not have any ill effects, not knowing key terminology associated with life insurance could result in you not making the best decisions for your family’s financial future.
While most American consumers understand the basic concept behind life insurance—when someone dies, another person receives a death benefit—many consider it a complex financial tool.*
The life insurance industry has no shortage of lingo. Before you sign on the dotted line for any policy, you should understand the language of life insurance.
To get you started, here’s some of the life insurance terminology you’ll encounter as you explore your best options for securing peace of mind for your loved ones.
Life Insurance Terminology in Plain Language
- Term life insurance – A type of life insurance that’s effective for a specified period of time (a “term”). If you die during the term period, your beneficiary receives a death benefit payment. This form of life insurance is straightforward and nearly always more affordable than permanent policies.
- Permanent life insurance – A type of life insurance that does not expire. It provides a death benefit and some degree of savings. Policies are more costly than term life policies.
- Death benefit – The money the life insurance company will pay to your beneficiary when you die. It gives them funds to help them pay for your funeral expenses, pay the rent or mortgage, pay for higher education, keep up with utility bills, etc.
- Premium – The payment you’re required to make in exchange for your policy.
- Primary beneficiary – The person you’ve designated to receive the death benefit paid by the life insurance company when you die.
- Contingent beneficiary/beneficiaries – The person or people (most commonly your children) who you’ve designated to receive the death benefit if the primary beneficiary is no longer living.
- Rating class – The risk category a life insurance company will place you in based on information in your insurance application, your age, and results of your medical exam (paramed). Several levels exist (in order of least to highest risk): Preferred Plus, Preferred, Standard Plus, Standard, Sub-standard. The lower the risk, the lower your premium.
- Underwriting – The life insurance company’s process of researching and gathering information about you and analyzing it to determine which rating class to place you in.
- Paramed exam – The medical exam required when applying for certain life insurance policies. It’s paid for by the insurance company and is often done conveniently at your home. The results help insurance companies determine which rating class you fit into.
- Quote – The estimated coverage and cost of a life insurance policy. It is not a guarantee. For instance, when you request a quote online for term life insurance, you will be given an estimated cost for the coverage amount you inquired about based on the information you provided. After the insurance company has gathered additional information and has done more research, it can tell you the exact coverage and cost you’re eligible for.
- Rider – An add-on to a life insurance policy that provides additional benefits or flexibility to better suit your specific needs. Examples include the waiver of premium rider and the term conversion rider.
- Waiver of premium rider – A rider that relieves you of paying future premiums for your life insurance policy if you’ve become seriously ill or disabled and cannot work.
- Term conversion rider – A rider that gives you the flexibility to convert your term life insurance policy into a permanent policy within a certain amount of time without undergoing another medical exam.
- Convertible – Describes a term life insurance policy that can be converted to a permanent policy (note that your premium will likely go up at that time because permanent policies cost more than term policies).
- Renewable – Describes a term life insurance policy that can be renewed at the end of the term without another medical exam.
Of course, this is just a sampling of the lingo you’ll see as you explore securing the financial well-being of your family. As you’re working with a trusted life insurance professional to determine what options are best for you, ask for clarification if you don’t understand what terminology means or why it matters.
Don’t be afraid to ask “stupid” questions. When it comes to the future of those you love, there’s no such thing.
*“Insurance Revealed” – An online survey of American consumers’ opinions and beliefs about life insurance conducted in the summer of 2012 by Praxis Research on behalf of ING U.S. and the ING family of life insurance companies