Reference
Every term, in plain English
Insurance runs on language designed by lawyers and actuaries. Here is what each of these words actually means, in the order you are likely to run into them.
The basics
- Death benefitThe amount the insurance company pays when the insured dies.
- The face amount of the policy, paid to whoever is named as beneficiary. Under current federal law it is generally received income tax free. Any loans taken against the policy or benefits accelerated while the insured was living are subtracted from it first.
- TermThe number of years a term policy stays in force.
- Usually 10, 15, 20, 25, or 30 years. During the term the premium and benefit are guaranteed. At the end the coverage stops unless you renew at a much higher rate or convert it. Term life explained.
- Face amountThe coverage amount stated on the policy.
- Another name for the death benefit as originally issued. Some policies grow or shrink the face amount over time, which is why the contract distinguishes between the face amount and the benefit actually payable.
- RiderAn add-on that changes what a policy does.
- Some riders cost extra, many are included. The ones worth asking about are accelerated benefit riders for critical, chronic, and terminal illness, waiver of premium if you become disabled, and a child term rider. Living benefits.
- Independent agentAn agent not tied to a single insurance company.
- A captive agent represents one carrier and can only offer its products. An independent agent is appointed with several and can place your application with whichever one underwrites your situation best. You pay the same premium either way, because rates are filed with the state.
Underwriting and applying
- UnderwritingHow an insurance company decides whether to insure you and at what price.
- A review of your health history, prescriptions, motor vehicle record, build, tobacco use, family history, occupation, and sometimes labs. The output is a decision and a rate class. Every carrier uses its own manual, which is why the same person gets different answers from different companies.
- Rate classThe pricing tier you qualify for.
- Commonly preferred plus, preferred, standard plus, standard, and then a series of substandard or table ratings. Online quotes almost always show preferred plus, which most people do not qualify for. The gap between classes is significant, and moving one class is worth real money.
- Accelerated underwritingApproval without a medical exam, using data instead.
- The carrier uses prescription history, motor vehicle records, and industry databases in place of a paramedical visit and labs. Decisions often come back in 24 to 72 hours. Availability depends on your age, the amount applied for, and how clean your file looks.
- Simplified issueHealth questions, no exam, full benefit if approved.
- You answer a short set of health questions and the carrier checks databases. Cost per dollar of coverage is higher than a fully underwritten policy, but coverage is immediate and in force from the effective date.
- Guaranteed issueNo health questions, with a waiting period on natural death.
- Nobody is declined. In exchange, death from natural causes during the first two or three years typically returns premiums plus interest rather than the full benefit, while accidental death is covered from day one. It is a genuine fallback when nothing else is available, and you should always be told plainly that this is what you are being offered.
- MIBThe industry database of prior insurance applications.
- The Medical Information Bureau holds coded records of previous individual life and health applications. It is one reason applying to five companies at once is a bad idea: the declines follow you.
- Table ratingA percentage increase over standard rates for elevated risk.
- Expressed as table 1 through table 16, or A through P. Each table typically adds about 25 percent to the standard premium. A rating is not permanent: if the underlying condition improves, your agent can request a reconsideration with documentation.
Inside a policy
- Cash valueThe savings component inside a permanent policy.
- Part of each premium accumulates inside the policy. Whole life grows on a guaranteed schedule stated in the contract. Indexed universal life credits interest based on an index, subject to a cap and a floor. Term insurance has no cash value at all.
- Policy loanBorrowing against your own cash value.
- No credit check and no application. Loans accrue interest, and any unpaid balance plus interest reduces the death benefit. Loaned aggressively without review, a policy can lapse and trigger a tax bill on gains you never received in cash.
- CapThe maximum interest rate credited in an indexed policy.
- With a 10 percent cap, an index gain of 18 percent credits 10. A gain of 6 percent credits 6. Caps are set by the carrier and can be changed over the life of the policy within the limits your contract states. IUL explained.
- FloorThe minimum interest rate credited in an indexed policy.
- Usually zero percent. If the index falls, credited interest is zero rather than negative. Policy charges still come out, so cash value can still decline in a zero credit year. The floor protects interest crediting, not the whole account.
- Participation rateThe share of an index move that gets credited.
- At 80 percent participation, a 10 percent index gain credits 8 percent. Some products use a cap, some a participation rate, some both. Read which applies to yours before you sign.
- Conversion privilegeThe right to turn term coverage into permanent coverage with no new exam.
- One of the most valuable and least discussed features of a term policy. It matters most if your health has changed since you bought it. The deadline to convert usually arrives years before the term itself ends, so find that date in your contract now rather than later.
- Paid-upA policy that requires no further premiums.
- Either by design, as in a 10-pay or 20-pay whole life, or by using accumulated cash value to buy a smaller permanent benefit outright. Coverage stays in force for life with nothing more to pay.
- LapseCoverage ending because premiums were not paid.
- Most policies include a grace period, commonly 30 or 31 days. If cash value exists, there may be options short of losing the coverage entirely. Call your agent before you miss a payment, not after.
- Free lookA window after issue to cancel for a full refund.
- New York requires one on every policy, and the exact length is printed on the first page of the contract. During it you can return the policy and get every dollar of premium back, no explanation needed.
Money and taxes
- Income tax free death benefitLife insurance proceeds are generally not taxable income.
- Under current federal law a death benefit paid to a named beneficiary is generally excluded from income tax. Estate tax is a separate question, and New York imposes its own estate tax at a threshold different from the federal one. Talk to a tax professional about your circumstances.
- Modified endowment contractA policy funded so heavily that it loses favorable tax treatment.
- Usually shortened to MEC. Overfund a permanent policy past IRS limits and distributions become taxable on a gains-first basis, potentially with a penalty before age 59 and a half. It is avoidable, and avoiding it is part of designing the policy properly.
- Surrender chargeA fee for taking money out early.
- Most common in annuities, where the period typically runs five to ten years and declines annually. Permanent life policies have their own surrender schedule. If you might need the money before the schedule ends, that is a reason to size the contract differently.
- DividendA return of surplus from a mutual insurance company.
- Mutual carriers are owned by policyholders. When results beat the assumptions built into pricing, part of the surplus can be returned as a dividend. Many carriers have paid one every year for a very long time, but dividends are declared annually and are never guaranteed.
Claims and beneficiaries
- BeneficiaryThe person or entity that receives the death benefit.
- Named on a form that overrides your will. Primary beneficiaries are paid first; a contingent beneficiary receives the benefit if no primary survives. Naming a minor child directly, or naming your estate, are the two most expensive mistakes people make here. Beneficiary mistakes.
- Contestability periodThe first two years, during which a claim can be investigated.
- If the application contained a material misrepresentation, the carrier can deny a claim filed within this window. After two years the policy generally cannot be contested except for outright fraud. It is not a waiting period, and it does not mean a first-year claim will not pay.
- Per stirpesA share passes down to that beneficiary's own children.
- If one of your named beneficiaries dies before you, per stirpes sends their portion to their descendants. The alternative, per capita, redistributes it among the surviving beneficiaries instead. Most forms let you specify, and the two produce very different outcomes.
- Insurable interestThe requirement that you would suffer a real loss if the insured died.
- It must exist when a policy is issued. Spouses, parents insuring children, and a business insuring a key employee all qualify. It is what prevents anyone from taking out a policy on a stranger.
- Accelerated benefitPart of the death benefit paid to you while you are living.
- Triggered by a qualifying critical, chronic, or terminal illness as defined in the rider, not in the brochure. Whatever is accelerated reduces what your beneficiary receives later, and the tax treatment depends on circumstances.
Next step
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