Do you know what your insurance exclusions (things not covered by policy) are, so you don't participate in risky behavior, like skydiving? What about other terminology, like riders, which refer to items you can add to a basic policy? If you're confused by some life insurance lingo, you're not alone.
A Western & Southern Financial Group survey concluded that 1 in 8 surveyed Americans didn't know whether their policy would cover funeral costs and other debts. By the way, it does!
Understanding your life insurance terms can ensure you don't inadvertently void the policy, thus ruining any protection for your loved ones upon your death. For example, if you don't make your premium payments, the coverage will end or lapse.
In this article, we'll explore some of the common life insurance terms that have confused policyholders. Having a clear understanding of what coverage you have, what you can add, and how/when a policy may end can ensure enough coverage for beneficiaries. Plus, learning about cash outs can help you access funds while alive.
What Confuses Policyholders the Most?
Understanding insurance policies can start with conversations with the agent who negotiated your contract. The previously mentioned Western & Southern Financial Group survey showed the top confusion points for people include:
- Differences between term and whole life
- Tax implications
- Pre-existing health conditions
- Borrowing against policy
Additionally, a whopping 70% of Gen Z clients had the least confidence about life insurance terms.
What Are Terms Related to Policy Type?
When you buy life insurance, you must choose a policy type. These life insurance terms are Term, Whole, and Universal, which distinguish your policy based on length, cash availability, and monthly premium expenses.
Term
Term life insurance is the cheapest option with the lowest monthly premiums. It's often available in lengths of 10, 20, 25, or 30 years, depending on the insurer. Be aware of when your policy length expires, so that you're not accidentally left without any life insurance coverage.
Once your policy expires, you have the option of renewing it on an annual basis. However, be aware that the rate may go up as you age. You may be able to convert it to a permanent insurance plan.
Whole
With this coverage, life insurance meets investment. Before the insurer makes a payment to beneficiaries upon your death, you can withdraw or borrow against the accumulated cash value.
Universal
This permanent coverage also includes a cash value that the policyholder can access while alive.
Regardless of what policy type you have, you'll pay a premium. This monthly charge to keep the policy active depends on your mortality, or death rate at a given age, which affects insurance risk. Age, gender, health, and lifestyle are considered in the cost calculation.
What Language Refers to Roles?
When you purchase an insurance plan, you're known as the policyholder or the insured, and the company you have your policy with is the insurer. The people who you intend to benefit from your life insurance payout are known as your beneficiaries.
You must explicitly name your beneficiaries in your policy. For most people, it will be their next of kin, such as their spouse and children.
You may also want to add grandchildren, a charity, or a parent. These policies help ensure loved ones you're responsible for can maintain their lifestyle, pay for your funeral costs, and other debts.
Paying Out a Policy
Whether policyholders are accessing living funds or beneficiaries receive money, there are a few ways it can occur.
- Cash Out: Using loans or withdrawals to access the accumulated cash value on permanent policies.
- Accelerated Death Benefits: Living benefits the policyholder can access for chronic or terminal illness.
- Fixed Period Option: Payments go out over a set period of time until the benefit and accrued interest run out.
- Fixed Amount Option: Instead of a lump sum, payments go to beneficiaries in a series of fixed amounts until earnings deplete.
- Joint First-To-Die: Covers two people, with payment going to the survivor.
- Joint Last-To-Die: Covers two people but only pays when the last one dies, making it an ideal option to protect children.
- Surrender Charge: If you decide to terminate a permanent plan, like Whole or Universal, for cash value, you'll pay this fee.
Exclusions to Learn About
Deciphering insurance terms about exclusions can help avoid leaving your beneficiaries with nothing despite paying your monthly premium.
Many insurers won't pay a claim if the policyholder:
- Died while committing a crime
- Died by suicide
- Lied on the application
- Participated in risky behaviors
Frequently Asked Questions About Life Insurance Terms
How Much Does a $1,000,000 Term Life Insurance Policy Cost?
Once the underwriter does an assessment to calculate your premium, considering your gender, health, age, and term length, you may pay a range from $30 to $400 monthly. A healthy 30-year-old may pay $30-$60, whereas a relatively healthy 50-year-old may have a $150-$400 premium for this policy. Once you reach the age of 50, your premium cost will rise substantially for any policy.
What Disqualifies Life Insurance Payout?
One of the biggest reasons why your life insurance won't pay out to beneficiaries is that you, the policyholder, lied about your overall health condition. If you lied about smoking, your family's health history, or participating in risky activities, it could disqualify any claims based on fraud and misrepresentation.
Many policies also have a suicide clause that prevents the payout if the suicide occurs within the first one to two years of the policy. High-risk activities that insurers don't like include:
- Private aviation
- Going to war
- Participating in extreme sports like skydiving
Even if you kept your policy within compliance during your lifetime, it won't be able to pay out without a known beneficiary.
Life Insurance Literacy Matters
Understanding life insurance terms makes it easier to have the best policy to ensure financial security for your loved ones and cover your funeral costs. While there are many terms that policyholders should understand in this article, don't be afraid to contact your local insurance agent as questions arise. Be aware of what's included and what exclusions can void a claim.
We hope this article has provided you with an insurance glossary guide you understand. Continue to search the website for related news.
This article was prepared by an independent contributor and helps us continue to deliver quality news and information.
