Life insurance plans come with a lot of terms that may be unfamiliar or confusing to consumers. After all, there’s no class in school that teaches you about insurance jargons. In this article, we’ll help you understand some of the more common words used when shopping for a policy.
Life Insurance
An agreement between an individual and a life insurance company. In exchange for a premium paid, the life insurance company promises to pay a death benefit to the beneficiaries nominated by the policyholder.
Insured Person
An insured person is an individual whose death is covered under a life insurance policy. A person can also insure a loved one.
Beneficiary
The person chosen to receive the death benefit upon the insured person’s death. Naming a beneficiary is simple. One can name a family member, charity, business, or even a friend. If one lives in a community property state, however, it’s important to know that naming anyone besides one’s spouse requires their consent.
Policyholder
The person who owns the policy, decides how much to pay, what their policy covers, and other details.
Premiums
Life insurance premiums are the payments the policyholder makes to the company for the protection they receive. When you buy term insurance, your premiums pay for the cost of administering the policy and for your life insurance coverage. When you buy whole life insurance, they also fund your cash value account.
Face Value
Face value refers to the amount of money a life insurance policy will pay out upon the policyholder’s death. The face value of a policy can change as you borrow from it or increase the amount of coverage.
Underwriting
When an insurance provider underwrites a life insurance policy, they evaluate the health and lifestyle of applicants to determine how much risk they pose to the company.
Cash Value Account
This is a part of a permanent life insurance policy that can increase in value over time. With some policies, it’s like earning a fixed amount of interest in a savings account. Others operate more like investment accounts, giving the policyholder control over how the money is invested.
The account is funded by the premium payments a holder makes. After the insurance company deducts its administrative costs and other expenses, it puts the rest into a cash value account. When a person is young, more of the premium will go into the account since they are relatively cheap to insure.
