You already know buying life insurance is a smart choice. But if you’re like many Americans, it can be hard to manage your policy when there’s so much insurance jargon. For example, you may want to add a rider for long-term care, but what if you’re not familiar with the term?
At Lumico, we like to say we’re “insurance made clear.” We’ve made it our mission to break through the jargon and help our customers understand what they’re buying. After all, we want you to make the most of your policy. To do so, you need to understand your insurance and how to ask for what you need.
To help, here are 15 important life insurance terms you may (or may not) have heard, and a brief explanation of what they mean.
- Agent: This person is your go-to resource for purchasing and managing your life insurance policy. At Lumico, we partner with best-in-class, licensed insurance agents who can help you obtain a policy or make necessary changes to your coverage. Whether you want to cash out part of your whole life policy or add an insurance rider, your agent is there to support you.
- Beneficiary: When you purchase life insurance, you need to name the person, group of people, or entity that will receive the policy’s benefit after you pass away. This is your beneficiary. There are two main types of beneficiaries: primary and secondary (contingent). A primary beneficiary is first line to receive the benefit after you die, and a contingent beneficiary is second in line, usually only receiving the benefit if the primary beneficiary dies or cannot be found.
- Cash value account: Most whole life insurance policies have a cash value account, which accrues money over time. Here’s how it works: you fund the account on a regular basis with your premium payments. Part of your payment goes into your policy and other insurance costs, and the rest goes into your cash value account. If needed, you can tap into this money before you die.
- Claim: In life insurance, a claim happens when you pass away. As soon as your insurance company hears that you’ve passed away, they begin the claim process. Initiating a claim starts the process of paying out a death benefit to your beneficiary(s).
- Death benefit: This is the money that your insurer pays to your beneficiary(s) after you pass away. A death benefit can be used to pay for final expenses, such as a funeral and burial, and can be used to pay off debt or leave a legacy to loved ones.
- Final expense insurance: Some people may just want a small policy to cover their funeral, and burial or cremation. That’s why final expense insurance exists. This relatively low-cost policy offers a smaller amount of money, but enough to cover immediate needs when you die. Sometimes this policy is referred to as “burial insurance.”
- Grace period: It’s important to pay your premiums on time. This way you can make sure your life insurance policy stays in place. But life happens, and it’s possible to be late on a payment. If you are late, you have a grace period—a period of time when your policy is still effective. In order to keep your policy running, you need to pay your late premium during a grace period.
- Insured person: Most likely, you’re the insured person, but that’s not always the case. Perhaps you handle the affairs for a loved one or a business owner. Regardless, the insured person is the individual who is covered by the life insurance policy. When the insured person dies, a death benefit is paid to a beneficiary.
- Policyholder: Often the insured person is the same individual as the policyholder, but not always. The policyholder actually “owns” the insurance policy, meaning they pay premiums and can make changes to coverage. Normally a policyholder has control over the policy's coverage details.
- Premium: This is the amount you pay to an insurance company to cover your policy. If you have a term life policy, your premium pays for your insurance product, as well as administrative costs. If you have a whole life policy, it pays for your product and funds your cash value account.
- Reinstatement: If you are late paying your premium (and you miss your grace period), and when the contract is no longer in force, you may be able to work with Lumico to reinstate your original policy’s terms. It’s best to talk to a licensed insurance agent to find out. Normally, you just need to pay any unpaid premiums along with interest.
- Rider: Sometimes, you need to add specific coverage to your policy. This optional agreement is called an insurance rider. For example, a person may add a long-term care rider that can help cover the cost of a nursing home. Meanwhile, an accelerated death benefit rider lets you access your benefit’s payout while you’re still alive and if you’re diagnosed with a terminal sickness. There are a few different types of riders, so it’s best to talk with an agent about your specific needs.
- Term life insurance: Depending on your age and financial goals, it may make more sense to buy a term life insurance policy. This policy covers you for a set period of time, usually 20, 25, or 30 years. Term life insurance is a popular choice because it usually costs less, but remember, it only covers you for a specific number of years. If you pass away after the term ends, your loved ones won’t receive a benefit.
- Underwriting: Most insurance companies have a team of underwriters. These are trained professionals who can evaluate the risk of insuring an individual and help decide premium rates. The process they use for deciding how risky a person is to insure is called “underwriting.”
- Whole life insurance: This type of policy lasts an entire person’s life—not just for a set number of years. For this reason, whole life insurance policies typically cost a little more than term life policies. But they can be very beneficial. A whole life policy usually includes a cash value account that grows over time. You can tap into this account before you die to help pay for end-of-life care and other expenses.
Nice job! You’ve read through all 15 life insurance terms, which means you’re well on your way to being an insurance pro. You’ve got the basics down, and you can have a fruitful conversation with an insurance agent about your policy. And remember, if you have questions about insurance terminology, you can always reach out to the team at Lumico.
