A Consumer’s Guide to Life Insurance Terminology

Penn Mutual

By Penn Mutual | September 1, 2020

Life insurance is a pretty important product. You pay premiums throughout your life, and when you die, your beneficiary gets a sum of money. But over our industry’s long history, we’ve sometimes used jargon that can make life insurance more difficult to understand. For example, accelerated death benefit. What’s accelerated, the death or the benefit? Makes a big difference! Read on, as we define some of our products’ terminology and benefits.

Term Life Insurance: A short-term, time-based policy similar to “renting.”  It covers you for a specific period of time, usually 10, 15, 20 or 30 years, during which time the premium never changes. But many term policies allow you to convert to permanent life insurance without evidence of insurability.

Convertible Term Insurance: Term insurance that provides a pathway to permanent life insurance later, when your protection and financial needs grow. Your future insurability is locked in when you buy the term insurance, regardless of changes in health when you are able to convert.

Permanent Life Insurance: A lifetime solution similar to “owning.” It stays with you, has the potential to grow in cash value that you can access and use throughout your life to meet your goals, and pays an income tax-free death benefit to your beneficiary.*

Whole Life Insurance: A type of permanent life insurance that has fixed premiums and guaranteed cash value accumulation. Whole life is typically a participating insurance policy, because it may also pay an annual dividend (not guaranteed), based on the experience of the insurance company.

Dividends: Payments awarded to participating life insurance policies, like whole life. Dividends are not guaranteed, but may be paid when the insurance company’s actual experience across several key measures is better than what was built into the price of the policies. Dividend awards are declared at the end of each calendar year for the following calendar year.

Universal Life Insurance: A type of permanent life insurance that can provide lifetime protection, and accumulation with cash value you can access, as long as the required premiums are paid on time.  The policy earns interest based on a rate set by the company. There are several types of universal life that have various ways to determine how interest will accumulate in your policy, and offer various types of guarantees.

Guaranteed Universal Life Insurance: A type of permanent life insurance that has flexible premiums and guaranteed lifetime protection. Guaranteed universal life may also provide cash value accumulation.

Cash Value: The accumulation component of a permanent life insurance policy. Depending on the product, the cash value may grow over your lifetime and can be accessed at any time to help meet your specific goals in life.

Death Benefit: Sometimes called the policy’s face amount. It’s the actual amount stated on the policy, which is paid to the beneficiary income tax-free at the death of the insured (for a permanent policy, this amount would be reduced by any outstanding loans you’ve taken against it).

Policyholder: The person who owns the policy. It is most often the same person who is insured. In some cases, the policyholder may be a relative or business partner of the insured individual.

Beneficiary: The person named on the policy who will receive the death benefit when the insured dies. The beneficiary can be any person, several people, or a business/organization, as determined by the policyholder, although it is usually a family member.

Premium: The cost of your life insurance policy, based on a number of factors including health and family history. Premiums are usually paid to the insurance company monthly, quarterly, semi-annually or annually.

Policy Loan: A loan you can use for any reason, taken from the accumulated cash value in your policy. Loans, which are usually income tax-free, reduce the policy values and death benefit but these can be restored by repaying the loan.

Rider: Additional benefits that you can purchase and add to your policy. Popular riders** include:

  • Disability Waiver of Premium—waives all premiums if the insured becomes totally disabled
  • Accidental Death Benefit—pays an additional death benefit to the beneficiary if the insured dies as a result of an accident
  • Accelerated Death Benefit—makes death benefit funds available to the policyholder in case of, for example, a terminal illness or chronic illness
  • Guaranteed Increase Option—allows you to increase your coverage without evidence of insurability at certain predetermined ages or life events, such as marriage or the birth or adoption of a child.

Financial Professionals: Trusted individuals who can assess your specific situation and help you create a financial strategy. Some financial professionals specialize in helping you find life insurance solutions that can help you protect your family or business and meet other financial goals.

Life insurance is a powerful tool to help you protect your family and meet today’s financial goals. A financial professional can show you how these sometimes confusing terms can work together to actually help simplify your life. If you don’t have a trusted financial professional, we can help you find one.

*Accessing policy cash value will reduce the policy values and death benefit, may result in certain fees or charges and may require additional premiums to maintain coverage.

**Optional riders and benefits may be subject to eligibility requirements, additional premium requirements and/or minimum or maximum coverage amounts. Availability and rider provisions vary by each state and insurance carrier.

This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. The information in this material is not intended as tax or legal advice. Always consult your legal or tax professionals for specific information regarding your individual situation.

Portions of this post originally appeared on vantislife.com by Vantis Life, a Penn Mutual company.

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