How Does Life Insurance Work?

Life insurance, in all forms, provides peace of mind to your loved ones. It ensures that a financial cash payout (tax-free) will be distributed to your beneficiaries upon your death.

There are never any restrictions regarding how your beneficiaries spend the money. Be it for funeral expenses, debts, income replacement, or any other reason, the money from a life insurance policy can be used for anything.

 

Life Insurance Glossary:  Terms & Definitions

a

A.M. Best

The premier credit rating agency for the insurance industry.

Accelerated Death Benefit Rider

This no-cost rider allows the owner to access a portion (typically up to 50%) of the death benefit while the insured is still alive. The insured must be diagnosed with a terminal illness and be given a life expectancy to exercise this rider.

Accidental Death

An unnatural death caused by an accident such as a car or plane crash.

Accidental Death Insurance

A type of life insurance that will only result in a death benefit payout if the death is deemed accidental. It will not pay a death benefit for any natural cause of death such as a heart attack or cancer.

Accidental Death Rider

An add-on to a life insurance policy that would double the death benefit payout if death is deemed an accident. This rider typically costs extra, although some policies automatically include it.

Age Band

A range of ages that determine the premium for a group rather than the being priced by specific ages.

Agency

A business entity authorized to sell insurance for one or more insurance carriers.

Agent

A person who is dully licensed to sell insurance. “Producer” is another common name for “agent.”

Annual Premium

The total annual cost of a life insurance policy.

Application

A method of providing the necessary information and authorizations to the insurer so they can determine your eligibility for coverage.

Apptical

A third-party company some insurers employ to process electronic or telephonic insurance applications.

APS

An acronym that stands for “Attending physicians statement.” It’s a report from a medical facility or physician that has treated a person applying for insurance. This report is typically ordered to validate the details of an applicant’s health history.

Automatic Premium Loan Provision

A no-cost provision you can add to cash value life insurance policies. It will borrow from any available cash value to ensure the policy does not lapse due to non-payment. It will continue to withdraw from the cash value for as long as there is sufficient money. Any cash value withdrawals via the APL count as a loan against the policy. You must elect to add this provision when applying. You cannot add it after the policy is issued.

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Backdating

When a life insurance effective date is set to a date before the actual application date. Backdating is done to secure the price of the applicant’s age before their most recent birthday. Backdating is also commonly referred to as “saving age.”

Beneficiary

The person(s) or entity(s) to whom the life insurance proceeds are paid.

Broker

An insurance agent contracted to sell insurance for multiple carriers rather than just one.

Build Chart

An underwriting guideline that limits the minimum and maximum weight of the insured based on their height.

Burial Insurance

A marketing expression that describes a small whole life insurance policy with lenient underwriting so that seniors with past health issues can still qualify. It pays out a quick tax-free cash benefit to your beneficiaries. There are no restrictions on how the money is spent. Burial insurance is also commonly referred to as “final expense insurance,” “funeral insurance,” “cremation insurance,” or “end of life insurance.”

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Cash Value

Money that has accrued in a permanent life insurance policy. The owner can borrow from this account which would count as a loan against the policy. Also, if the policy is ever surrendered, the cash value will be paid out to the owner.

Certificate

The legal insurance contract issued by a fraternal benefit society. The term “insurance certificate” is similar to “insurance policy.”

Child Rider

An add-on to an adult life insurance policy that would provide a life insurance benefit for children. This rider typically costs extra.

Children's Life Insurance

A permanent life insurance policy designed to insure minors. Children’s life insurance is always a whole life or universal life contract. There is no term life insurance for minors.

Commission

A form of compensation for an insurance agent or agency to sell an insurance policy. The amount of commission paid to an agent or agency depends on the commission rate times the annual premium of the contact.

Common Carrier Accidental Death

A death that occurs while traveling on a fare-paying mode of public transportation such as a plane, bus, or train.

Conditional Receipt

Provides temporary coverage while the application is in the underwriting process. If the applicant dies before the approval, the insurance company will still pay the complete claim, provided they would have approved the applicant.

Contestability Clause

Grants the insurance carrier the right to investigate a life claim during the first 12-24 months (varies based on the state) of the contract. They will order the insured’s medical records to verify if the applicant had any health issues before the effective date. Their goal is to confirm if any conditions (at the time of application) would have caused them never to issue the policy in the first place. If they find evidence of health misrepresentation, whether intentional or not, they will rescind the policy, not pay the claim and simply refund the premiums paid. If they find no evidence of health misrepresentation, they will pay the full death benefit. The contestability clause is not the same as a waiting period.

Contingent Beneficiary

A secondary beneficiary that would only be entitled to a life insurance payout if all primary beneficiaries were deceased at the time of the insured’s death.

Conversion Privilege

Grants the policy owner the right to convert their term life policy to a whole life contract without having to show evidence of insurability. Typically, the conversion privilege only exists for 50% of the term length.

Cremation Insurance

A marketing expression that describes a small whole life insurance policy with lenient underwriting so that seniors with past health issues can still qualify. It pays out a quick tax-free cash benefit to your beneficiaries. There are no restrictions on how the money is spent. Cremation insurance is also commonly referred to as “final expense insurance,” “funeral insurance,” “burial insurance,” or “end of life insurance.”

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Death Benefit

The amount of money payable upon the insured’s death. “Face value” is an alternate way of saying “death benefit.”

Death Claim

A formal request to a life insurer to pay a death benefit due to the insured’s death.

Death Insurance

A common alternate expression for “life insurance.” It’s a contract between a person and a life insurance company. The insured agrees to make regular premium payments according to a schedule. The insurer agrees to pay a death benefit upon the insured’s passing.

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Effective Date

The specific date the terms and conditions of an insurance contract begin.

End Of Life Insurance

A marketing expression that describes a small whole life insurance policy with lenient underwriting so that seniors with past health issues can still qualify. It pays out a quick tax-free cash benefit to your beneficiaries. There are no restrictions on how the money is spent. End-of-life insurance is also commonly referred to as “final expense insurance,” “funeral insurance,” “burial insurance,” or “cremation insurance.”

Extended-Term Insurance

A nonforfeiture provision that provides temporary life insurance coverage in a whole life policy after premiums have not been paid. The cash value in a whole life contract dictates how long the extended term insurance lasts.

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Face Value

The amount of money payable upon the insured’s death. “Death benefit” is an alternate way of saying “face value.”

Final Expense Insurance

A marketing expression that describes a small whole life insurance policy with lenient underwriting so that seniors with past health issues can still qualify. It pays out a quick tax-free cash benefit to your beneficiaries. There are no restrictions on how the money is spent. Final expense insurance is also commonly referred to as “burial insurance,” “funeral insurance,” “cremation insurance,” or “end of life insurance.”

First To Die Policy

A life insurance contract that simultaneously insures two married adults. The contract terminates upon the first spouse’s passing, leaving the surviving spouse uninsured (unless insured by another policy). It’s also commonly referred to as a “Joint life insurance policy.”

Fraternal Benefit Society

A non-profit membership group that provides its members with many benefits, including life insurance, for a better quality of life.

Free-Look Period

This provision grants the policyholder time to review their insurance policy and refuse it for any reason. If you cancel during this time, the insurance company will refund any paid premiums. The free look period typically lasts 15-30 days (varies by state).

Funeral Insurance

A marketing expression that describes a small whole life insurance policy with lenient underwriting so that seniors with past health issues can still qualify. It pays out a quick tax-free cash benefit to your beneficiaries. There are no restrictions on how the money is spent. Funeral insurance is also commonly referred to as “burial insurance,” “final expense insurance,” “cremation insurance,” or “end of life insurance.” Funeral insurance is a type of life insurance (see funeral insurance vs. life insurance).

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Grace Period

The period between a policy being past due and officially lapsing.

Graded Benefit

An expression that refers to a health rating for a final expense insurance policy. Generally, a carrier will charge an applicant more for a graded benefit plan and a limited payout if the insured dies in the first two years. This type of plan will either have a partial or full waiting period (varies by the company) during the first two years.

Grandchild Rider

An add-on to an adult life insurance policy that would provide a life insurance benefit for grandchildren. This rider typically costs extra.

Guaranteed Acceptance

A type of life insurance underwriting that does not require the applicant to answer any health or lifestyle questions. So long as the insured is mentally capable of agreeing to the policy being issued, acceptance is assured. Nearly every time, a guaranteed acceptance policy will be a whole life insurance contract. It’s also commonly referred to as a “guaranteed issue.”

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Immediate Coverage

An expression that refers to a life insurance policy that does not have a waiting period for natural causes of death during the first two years. It’s also commonly referred to as “no waiting period coverage.”

Insurable Interest

An expression that means a person or entity would experience a financial peril upon the insured’s passing.

Insurance

A contract between an insurer and a person or entity where the insured would receive financial compensation or reimbursement due to a covered loss.

Insurance Carrier

A business entity that is legally authorized to issue insurance contracts. The term “insurance carrier” is also commonly referred to as “insurance company.”

Insurance Company

A business entity that is legally authorized to issue insurance contracts. The term “insurance company” is also commonly referred to as “insurance carrier.”

Insured

The person(s) or entity(s) covered by an insurance contract.

Irrevocable Beneficiary

A beneficiary designation (whether primary or contingent) that requires their consent for future beneficiary changes.

Issue Ages

The minimum and maximum ages a life insurance product is available to new applicants.

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Joint Life Insurance

A life insurance contract that insures two married adults simultaneously. The contract terminates upon the first spouse’s passing, leaving the surviving spouse uninsured (unless insured by another policy). It’s also commonly referred to as a “First to die policy.”

k

Knockout Questions

A section of a health questionnaire in a life insurance application listing health conditions that would cause the applicant to be outright declined.

l

Lapse

When an insurance policy terminates due to non-payment.

Level Benefit

An expression that refers to a health rating for a final expense insurance policy. Generally, a level benefit plan will be the least expensive rate classification the insurer offers. It always has no waiting period during the first two years.

Level Premium

A life insurance premium that will always remain the same.

Life Insurance

An insurance contract that provides a monetary payout upon the insured’s passing.

Life Insurance For Seniors

Life insurance products that are specifically designed for seniors. Life insurance for seniors is not one set type of life insurance. It varies by the company. It can either be whole life, universal life, or term life.

Line of Authority

The type(s) of insurance a producer is authorized to sell.

Loan

A withdrawal from the cash value in a permanent life insurance policy. Outstanding loans are subject to interest accrual and will reduce the death benefit payout.

m

Medical Exam

A procedure where a life insurance applicant must meet with a qualified medical technician. The technician will gather the necessary information to complete the life insurance application’s underwriting. The technician will collect a blood & urine sample, a blood pressure reading, and measure your height and weight. This is also commonly referred to as a “paramedical exam.”

MIB

An acronym that stands for “Medical Information Bureau.” MIB operates as an information exchange between participating insurance companies. When an applicant formally applies for life insurance, the health information submitted to the insurance carrier is stored within MIB’s database. Furthermore, any health information discovered about an applicant via a medical exam or through the acquisition of medical records is also logged within their database. If an applicant applies for coverage with a life insurance company that participates with MIB, the insurer will search MIB’s database for any records connected to the applicant. Their goal is to better assess risk by uncovering potential health information about the applicant that was provided or discovered due to prior life insurance applications with other carriers. It’s important to note that preliminary discussions of health with an agent or company are informal and not sent to MIB. You have to submit an actual application for any data to be reported to MIB. For example, if you are seeking a life insurance quote and you tell an agent that you had a heart attack five years ago, that information is not reported to MIB. You would have to indicate in a formal application that you had a heart attack (or any condition) for it to be reported to MIB.

Milliman Intelliscript

An organization that contains prescription history and medical diagnosis information for Americans. Life insurance companies pay a fee to access Milliman’s database as part of their underwriting process. An applicant must give the insurer consent to access their protected health information. Only after doing so can an insurer access an applicant’s health records in Milliman’s database.

Modal Premium

The frequency by which life insurance premiums are paid. Life insurance companies typically allow policyholders to pay monthly, quarterly, semi-annually, or annually.

Modified Benefit

An expression that refers to a health rating for a final expense insurance policy. Generally, a carrier will charge an applicant the highest rate possible for a modified whole life insurance plan and impose a full two-year waiting period for non-accidental death during the first two years.

Mortgage Protection Insurance

A marketing expression that generally refers to a term life insurance policy. Term insurance is typically chosen since a mortgage is also temporary. It would stand to reason that purchasing a temporary life insurance policy makes sense to cover a temporary liability. Mortgage protection insurance is appreciatively different from “private mortgage insurance,” which is insurance to protect the lienholder if the borrower defaults on their loan.

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No Exam

A type of life insurance underwriting that does not require an applicant to meet with a paramedic to provide a blood and urine sample. To qualify for a no-exam policy, the applicant generally only has to answer health questions. In addition, the insurer will analyze their prescription history and possibly request medical records or a statement from a physician(s). This is also commonly referred to as a “simplified issue” or ‘non-med” policy.

No Health Questions

A type of life insurance underwriting that does not require the applicant to answer any health or lifestyle questions. So long as the insured is mentally capable of agreeing to the policy being issued, acceptance is assured. Nearly every time, a guaranteed acceptance policy will be a whole life insurance contract. It’s also commonly referred to as a “guaranteed issue” or “guaranteed acceptance.”

No Waiting Period

An expression that refers to a life insurance policy that will pay out 100% of the death benefit for natural or accidental causes of death during the first two years. It’s also commonly referred to as “immediate coverage life insurance.”

Non-Med

A type of life insurance underwriting that does not require an applicant to meet with a paramedic to provide a blood and urine sample. To qualify for a no-exam policy, the applicant generally only has to answer health questions. In addition, the insurer will analyze their prescription history and possibly request medical records or a statement from a physician(s). This is also commonly referred to as a “simplified issue” or ‘non-exam” policy.

Non-Participating Whole Life Insurance

A type of whole life insurance that does not pay dividends.

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Owner

The individual or entity in control of and owns any assets in a life insurance policy.

p

Paramedical Exam

A procedure where a life insurance applicant must meet with a qualified medical technician. The technician will gather the necessary information to complete the life insurance application’s underwriting. The technician will collect a blood & urine sample, a blood pressure reading, and measure your height and weight. This is also commonly referred to as a “medical exam.”

Partial Waiting Period

An expression used to describe a life insurance policy that would pay out a portion of the death benefit during the first two years. Typically, these plans would pay out 30-40% for deaths during the first 12 months. For death during months 13-24, the payout is typically 50-75%. After two years, the full death benefit becomes payable for any reason. Many final expense insurance companies will use the word “graded” to describe this type of plan.

Participating Whole Life Insurance

A type of whole life insurance that pays dividends.

Payor

The individual or entity paying for a life insurance policy. The payor may be different from the insured or the policy owner.

Permanent Life Insurance

A life insurance category that offers lifelong benefits and cash value accumulation. Permanent life insurance will be either whole life or a universal life contract.

Personal Health Interview

When a life insurance company orders an interview with the applicant to ask them some clarifying health questions.

Policy

A legal contract between an insurance company and the insured. The insured agrees to make regular premium payments. The insurer agrees to pay the defined benefit for a covered loss.

Policy Fee

An additional charge to a life insurance policy above the cost of the insurance itself. Generally, it’s added on to cover administrative costs. It’s important to remember that the premiums you make already have this fee baked in. Policy fees are not something you pay in addition to your premiums. For example, if your policy costs you $47 per month and it has a $60 policy fee, the $47 already includes the policy fee. You would always only pay $47.

Pre-Existing Condition

Any health condition(s) that existed before the policy was issued. Simply having pre-existing health issues does not preclude someone from qualifying for a life insurance product. The compelling factors are generally: What are the conditions? How severe are they? When did they occur? Most health conditions are insurable, and there are guaranteed acceptance policies as a last resort.

Pre-need Policy

A life insurance policy with the funeral home as the beneficiary. You will fully design your funeral at the funeral home and settle on an exact price. The pre-need policy provides coverage equal to the cost of your funeral. Then upon your passing, the policy pays the benefit to the funeral home so that they can carry out your wishes.

Pre-Paid Funeral Plan

A plan set up directly with a funeral home. You would fully design your funeral and settle on an exact price. The funeral home gives you the option to pay in total upfront or via installments. Once you’ve made all your payments, the funeral is fully paid for regardless of when you die.

Preferred Rating

An expression that refers to a health rating for a final expense insurance policy. Generally, a preferred rating will be the insurer’s least expensive rate classification. It always has no waiting period during the first two years.

Primary Beneficiary

The first person(s) or entities(s) entitled to receive the death benefits of a life insurance policy after the insured’s death.

Producer

A person who is dully licensed to sell insurance. “Agent” is another common name for “producer.”

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Quote

A preliminary non-binding cost estimate for life insurance.

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Reduced Paid-Up

A nonforfeiture provision of a permanent life insurance policy allowing the policy owner to permanently convert their policy to a lower coverage amount. Once this change is executed, the policy remains in force indefinitely and does not require any more premium payments.

Reinstatement Of Insurance

An application to reactivate a lapsed life insurance policy.

Replacement Of Insurance

When an applicant applies for life insurance with the intent to cancel or modify an existing life insurance policy if the new policy is issued.

Return Of Premium

An expression that refers to a type of final expense insurance policy that will charge an applicant the highest rate possible. Additionally, the policy will have a full two-year waiting period for non-accidental death during the first two years.

Rider

An add-on to a life insurance policy covering a different risk. Riders come in many forms and may or may not require an additional cost.

Risk Assessment

When an insurance agent has a preliminary discussion with a client to determine their eligibility with each insurance company.

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Save Age

When a life insurance effective date is set to a date before the actual application date. Backdating is done to secure the price of the applicant’s age before their most recent birthday. This is also commonly referred to as “backdating.”

Senior Life Insurance

A marketing expression describing various life insurance products available to seniors. Depending on which company uses this label, they could be referring to a term, whole, or universal life insurance product.

Simplified Issue

A type of life insurance underwriting that does not require an applicant to meet with a paramedic to provide a blood and urine sample. To qualify for a simplified issue policy, the applicant generally only has to answer health questions. In addition, the insurer will analyze their prescription history and possibly request medical records or a statement from a physician(s). This is also commonly referred to as a “no-exam” or “non-med” policy.

Standard Rating

An expression that refers to a health rating for a final expense insurance policy. Generally, a standard rating will be the second least expensive rate classification the insurer offers. It always has no waiting period during the first two years.

State Availability

All the states where an insurance product is available.

State-Regulated Life Insurance

A deceptive marketing tactic that makes a life insurance solicitation seem as if it was endorsed by a local, state, or federal government entity. Nefarious insurance agents trick consumers into thinking these “state regulated life insurance” programs are created and administered by the government. Often, the consumer has the impression that they are entitled to the advertised benefit free of charge like other government programs. In the end, there is no connection to any government entity, and consumers who respond to these deceptive ads are plagued with in-person and telephonic life insurance solicitations.

Suicide Clause

A standard provision in every life insurance contract that exempts the insurer from paying the death benefit during this period if death is from suicide. Typically, the suicide clause lasts 24 months.

Surrender

When a policy owner elects to cancel a life insurance policy. When a life insurance policy is surrendered, any cash value is paid to the policy owner.

Surrender Value

The net dollar amount paid to the policy owner upon surrendering a life insurance policy. The surrender value is typically a little bit more than the total current cash value.

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Temporary Life Insurance

A type of life insurance that is designed to expire after a defined period of time. The policy may last for a specified number of years or until you reach a certain age. This is also commonly referred to as “term life insurance.”

Term Life Insurance

A type of life insurance that is designed to expire after a defined period of time. The policy may last for a specified number of years or until you reach a certain age. This is also commonly referred to as “temporary life insurance.”

Trustpilot

A consumer review website that allows users to leave feedback about businesses.

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Underwriter

An individual employed by an insurance carrier who is responsible for determining if an applicant is eligible for the life insurance policy for which they applied.

Underwriting

The process of an insurance company analyzing data to determine if an applicant is eligible for the insurance for which they applied.

Unit Of Insurance

An unusual way of packaging life insurance benefits where the cost of each unit is the same regardless of insurability factors like age, gender, or health. Instead of the cost of the life insurance coverage varying, like with most insurance carriers, the coverage provided by a unit is what varies depending on insurability factors. The most prominent example of this practice is the Colonial Penn 995 plan. A unit of their coverage costs everyone just $9.95 per month. The coverage that a single unit provides varies depending on the age and gender of the applicant.

Universal Life Insurance

A type of permanent life insurance that offers the policyholder cash value growth and flexibility with their payments. The longevity and premium requirements of these plans depend on various factors. For example, a universal life policy allows you to adjust or skip payments. However, doing either could result in the insurance company requiring higher monthly payments in the future or cash deposits in addition to your regular premiums. Another factor to consider is how and if the policy owner accesses the cash value. The policy owner can withdraw the cash value anytime they please. However, cash value withdrawals that are not repaid can result in the premature depletion of cash values. If that were to happen, the premium required to keep the policy in force would increase dramatically. Finally, how well the insurance company invests excess premiums above the cost of insurance also greatly impacts the performance of the policy. It should be noted that there are many different types of universal life insurance plans that offer varying benefits.

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Waiting Period

A period whereby any non-accidental death of the insured will not result in the payout of the death benefit. Instead of paying the death benefit, the insurance carrier would merely refund the premiums paid plus a small amount of interest (on the payments).

Whole Life Insurance

A type of permanent life insurance with ironclad guarantees. This type of permanent policy guarantees that premiums will never increase, coverage lasts forever, and the death benefit won’t decrease. Additionally, it will accrue cash value for future growth. The policy owner is entitled to borrow from the cash value any time they please.