Life Insurance Basics
Life insurance is a very competitive industry, and because of this, there are many choices when it comes to getting the coverage that you need. It is important not to get lost in the jargon, though; not all policies are the same, and the details are often hidden within the fine print. Before you make a life insurance purchase, know the basics when it comes to terminology and policy types – and what makes each offering unique.
Fundamental Life Insurance Terms
Life insurance is a contract between a policyholder and an insurer. Understanding the key terms will help you distinguish the differences between policy types.
- Application – A statement of information concerning the person applying for life insurance that the insurer uses to determine the applicant’s risk and premium.
- Beneficiary – The person who will receive the policy proceeds upon the death of the insured.
- Cash Surrender Value/Cash Value – The cash amount the policyholder can receive if the policy is voluntarily terminated prior to its maturity or the insured’s death.
- Dividend – Partial premium returns based on the difference between the premium charged and the actual expense, mortality, and investment experience.
- Face Amount – The dollar amount stated on the policy that will be paid to the beneficiary upon the insured’s death or policy maturity. The face amount does not include any additional payouts for accidental death coverage or other special provisions.
- Free Look Provision/Free Look Period – A specified period of time in which a policyholder can review the insurance policy issued and receive a full refund, if desired.
- Insurable Interest – If purchasing life insurance on another person, the policyholder must have an insurable interest in the insured. For blood relatives, this could mean a bond of affection or financial support. For others, there must be an economic interest in the insured’s life – like within a business partnership.
- Non-forfeiture – If a policyholder decides to stop premium payments on a policy with a cash value, non-forfeiture options include taking out the cash value, using the cash to purchase extended-term insurance, or buying a reduced, paid-up policy.
- Policy – The legal document that outlines the terms of the life insurance contract as it has been issued by the insurer.
- Policy Proceeds – The dollar amount actually paid on a policy upon death, maturity, or surrender.
- Policyholder – The person who owns the policy. Although this is typically the insured, it can also be a person with an insurable interest in the insured’s life.
- Premium – The payment amount required to keep the policy in force. Payments can usually be made monthly, quarterly, semi-annually, or annually.
- Rating – The basis for extra premium charges based on the insured’s risk classification.
- Underwriting – The process used by the insurer to evaluate the application and determine eligibility – as well as the premium amount.
Life Insurance Policy Types
Some types of policies accrue a cash value, while others offer higher death benefits for a less-expensive premium. There are pros and cons to each, but with so many offerings in the marketplace, there is truly a policy for everyone – at every life stage.
A temporary policy that only pays out if the death occurs during the policy term, which is typically up to 30 years. There are several types of term policies, like level term, decreasing term (i.e., the policy payout decrease over time), and increasing term (i.e., the policy proceeds increase over time).
- Pros: Term premiums are less expensive than their whole-life counterparts, letting policyholders get more coverage per dollar. The premiums are also static during the policy term.
- Cons: The policy has no cash value, so if the insured doesn’t die within the term period, there will be no payout. Premiums are re-evaluated at the end of the term and can increase significantly upon renewal.
A permanent policy stays in force until the insured dies, as long as premium payments are up-to-date. There are many types of permanent policies, including traditional whole life, universal life, variable life, and variable universal life.
- Pros: Permanent-policy premiums are used to pay death benefits and accrue cash values. If the policyholder decides to surrender the policy, the cash value presents several non-forfeiture options. Additionally, many of the policy types offer flexibility when it comes to premium amounts and cash-value accrual.
- Cons: These policies are significantly more expensive than term policies.
Contact a Licensed Life Insurance Representative
With so many options from which to choose, contact a licensed life insurance agent for guidance. Licensed representatives, like those at Partnership Wealth Management, can walk you through every option and help you evaluate your needs. With a little due diligence, you can find a policy that fits your requirements and your budget.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific legal or insurance advice to any individual. We suggest that you discuss your specific situation with a licensed and qualified life insurance professional.
As a Registered Investment Advisor (RIA), Partnership Wealth Management is committed to providing our clients with financial planning and wealth management services to help them make the most of their investments. At Partnership Wealth Management, we have a long history of working with the LGBT community. Among the many services we offer are financial planning and estate planning strategies for gay and lesbian couples. Financial planning is an important part of preparing for the future; contact us today to get started: www.partnershipwm.com.