Life Insurance Glossary

Agent– An agent provides financial planning advice, and is licensed to sell  and service life insurance products.  A good agent always acts in the best interest of his clients by fitting products to their needs.

Annuitant– The stated person eligible for annuity benefits during the payout period of an annuity contract. An annuitant can not be changed once the contract is issued.

Annuity– An annuity promises a fixed payout at a later date for a specified period of time in exchange for payments made to the insurance company.

Beneficiary– The beneficiary is the person(s) or entity(s) who receive the death benefit of a life insurance contract upon death of the insured.

Cash Value– Most types of life insurance contracts have a cash value which builds over the lifetime of the policy.  The cash value can be accessed by the owner for loans and withdrawals, while still keeping the insurance in force.

Death Benefit– The amount paid to the beneficiary by the insurance company upon death of the insured person.

Dividend– A payment made yearly from a whole life insurance policy to the owner.  Policies are not guaranteed dividends but most major insurance companies have made dividend payments consistently since they were founded.

Free Look– The free look period is the period of time required by law after a contract is delivered to the owner, where the owner can decide not to accept the contract and be refunded all premiums paid.  If an insured person dies during the grace period the insurance company is still required to pay the full death benefit.  Free look period lengths vary by state but are 10 days long in most states.

Grace Period– The grace period is a 31 day period of time required by law after a missed payment, where the contract remains in force and a death benefit is required to be paid.

Guaranteed Insurability Rider– A rider which provides the owner of a life insurance policy the option to add additional death benefit, without providing any proof as to the insurability of the insured person.

Incontestability Clause – A provision in most life insurance policies that prevents the provider from voiding coverage due to a misstatement by the insured after a specific amount of time has passed.

Insured– The named person in the contract whose death triggers a death benefit payout by the insurance company to the beneficiary.  All underwriting and risk considerations are based on the insured in a contract.

Joint Life Insurance– A policy with two insured’s, normally spouses, who share one life insurance policy.  This can be less expensive than owning two separate policies.  Joint life insurance contracts come in two forms, first to die and second to die, depending on which death triggers the death benefit payment.

Juvenile Life Insurance – A life insurance policy that insures the life of a minor.  It provides tax advantages as well as a life time of benefits for the child and his parents.

Lapse– When premium payments are not made in a timely manner and no cash value remains in the policy.  This effectively terminates your policy, though there may be provisions to reinstate the policy for a period of time without underwriting required.  If death of the insured occurs when a policy is in lapsed status, no death benefit is paid.

Law Of Large Numbers– The reason life insurance can be inexpensive for everyone.  Over a large enough sample of people a life insurance company can accurately predict at what age the average client will die, and they can price their insurance accordingly, even though some clients will die at a very young age.

Life Insurance– Life insurance is a contract between an insurance company and the owner of the policy which requires the insurance company to pay a stated death benefit upon the death of an insured person.  Life insurance is used to transfer the financial risk of a persons death to the insurance company.  It is also used for savings and investments purposes and to pass an estate on to the next generation in a tax efficient manner.

Loan– Life insurance contracts with a cash value typically allow the policyholder to borrow money against the cash value, tax free at time of loan and for any purpose.  The loan does not necessarily need to be paid back to keep the insurance in place.

Medical Exam– A medical exam is performed during the underwriting process prior to approval for life insurance policies.  This is also known as a paramedical exam.  The purpose of the exam is to more accurately assess the risk of premature death, and to place each person in the appropriate underwriting tranche.

Modified Endowment Contract (MEC)– Because life insurance enjoys tax benefits, there are rules regarding the amount of money that can be paid into a contract.  If too much money is paid, the policy will be considered a modified endowment contract and may be subject to taxation in some circumstances.

Owner– The owner of the contract is responsible for making premium payments, designating beneficiaries, and has all rights of contract changes.

Premium– Premium is the amount of money paid into an insurance contract.  Depending on how the contract is structured, the premium payment may be more or less than the true cost of insurance.  The difference between premium paid and cost of insurance will result in adjustments of the cash value.  In a term insurance contract premium and cost of insurance usually match exactly.

Rating– This is the risk class the insured is deemed to be after undergoing underwriting by the insurance company.  People with similar risk characteristics are grouped together so that the insurance company can accurately predict the expected age of death for a given risk class.  Lower risk classes (higher ratings) enjoy less expensive insurance because the expected age of death is later.  The name of each rating class can vary amongst insurance companies but preferred plus, preferred, select, nonsmoker, and smoker are common classes.

Reinstatement– Reinstatement occurs after a policy has lapsed.  This process involves a payment to the insurance company which will make the policy in active standing once again, and may require a statement from the client that their health has not changed, or reinstatement may even involve underwriting.

Rider– A rider is an additional feature or benefit added to a life insurance policy.  A rider may or may not have an associated charge.

Risk– Risk is the possibility of an outcome occurring that is not an expected result.  While this can refer to both good or bad outcomes, usually people use risk to refer to a negative possibility.  Risk in the life insurance industry refers to risk of a premature death.  Life insurance helps protect beneficiaries from the loss of income from this risk.

Second To Die Life Insurance– A jointly owned policy where the death benefit payment is made upon the death of both insureds.

Surrender– A surrender is when a policy owner terminates insurance coverage for the purposes of obtaining the cash value of the policy, before death of the insured.

Surrender Value– The cash value of a policy if surrendered.  May not be the same as the account value due to surrender charges.

Term Life Insurance– Term life insurance is a temporary insurance contract that will expire at a stated point in the future.  Normally the least expensive form of insurance coverage.

Term Life Insurance Conversion– A conversion is a privilege with many term life policies which allows the owner to convert his/her term life insurance to a whole life insurance policy without the insured person undergoing any health underwriting.  The whole life policy has the same health rating as the original term policy.  This privilege guarantees insurability for the insured person.

Universal Life Insurance– A form of insurance with a flexible premium payment structure, and a cash value that is not necessarily guaranteed.

Variable Universal Life Insurance– A life insurance policy in which the account value is invested in variable funds.  The price of the variable funds are normally tied to movements in equity and fixed income markets.  This type of policy has higher fees and costs of insurance but if the performance of the variable funds is strong the owner could end up with a higher cash value than a traditional life insurance policy.

Waiver of Premium Rider– A waiver of premium rider will waive all life insurance premiums in the event of a total disability by the insured.

Whole Life Insurance– The standard and oldest form of modern life insurance.  Whole life insurance is guaranteed to be in place for the entire life of the insured.  Premium payments are typically level, and may end at some point in the future.  Whole life insurance guarantees a minimum cash value throughout the life of the policy if all premium payments are made in a timely manner.  The most secure form of life insurance available.

Ariston Advisory Group

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Ste 304
Red Bank, NJ, 07701

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