Life Insurance – Key Terms You Must Understand
Buying life insurance is one of the most enjoyable things you will do in your life. Okay, that's a massive overstatement. The fact is most people hate buying life insurance and much of it comes down to not understanding the language being used. Well, let's see if we can correct that.
Talk with an insurance agent for a few minutes and your eyes will start watering. It's like being in a foreign country. This person is talking to you, but you have no idea what they are saying. Fortunately, understanding a few key terms can go a long way to clearing up the confusion.
Policy
This is the contract between you and the insurance company.
Insured
The insured is the person whose life the policy is based upon. For instance, I might buy a policy that pays out to my wife if I die. In such a case, I am the insured on the policy.
Death Benefit/Face Value
This is the amount that will be paid out should the insured person die. The term face value is often used because "death benefit" isn't a great phrase for turning sales!
Beneficiary
The beneficiary is the person or persons that receive the payout from the policy should the insured pass away. The owner of the policy designates in writing who the beneficiaries will be. State law may require that spouses be listed in certain situations.
Term Life Insurance
A "term" policy is one that covers a preset number of years, which is where the name comes from. As long as you pay the premiums, the policy will be in effect. At the end of the term, the policy is terminated automatically and the parties head their separate ways.
Permanent Life Insurance
A permanent policy is one that lasts for your life so long as premiums are paid. There is no expiration date as found with a term policy. There are a variety of types of permanent life insurance ranging from equity index policies to whole live and variable options. These policies tend to be more expensive, but also allow you to build up a cash value within them on a tax-deferred basis. Put in terms we can all understand, these are used for estate planning purposes.
This is obviously a rather limited set of terms. You'll be surprised, however, how far they can take you when it comes to understanding your life insurance options. Ultimately, everything involving these policies boils down to these terms.
Talk with an insurance agent for a few minutes and your eyes will start watering. It's like being in a foreign country. This person is talking to you, but you have no idea what they are saying. Fortunately, understanding a few key terms can go a long way to clearing up the confusion.
Policy
This is the contract between you and the insurance company.
Insured
The insured is the person whose life the policy is based upon. For instance, I might buy a policy that pays out to my wife if I die. In such a case, I am the insured on the policy.
Death Benefit/Face Value
This is the amount that will be paid out should the insured person die. The term face value is often used because "death benefit" isn't a great phrase for turning sales!
Beneficiary
The beneficiary is the person or persons that receive the payout from the policy should the insured pass away. The owner of the policy designates in writing who the beneficiaries will be. State law may require that spouses be listed in certain situations.
Term Life Insurance
A "term" policy is one that covers a preset number of years, which is where the name comes from. As long as you pay the premiums, the policy will be in effect. At the end of the term, the policy is terminated automatically and the parties head their separate ways.
Permanent Life Insurance
A permanent policy is one that lasts for your life so long as premiums are paid. There is no expiration date as found with a term policy. There are a variety of types of permanent life insurance ranging from equity index policies to whole live and variable options. These policies tend to be more expensive, but also allow you to build up a cash value within them on a tax-deferred basis. Put in terms we can all understand, these are used for estate planning purposes.
This is obviously a rather limited set of terms. You'll be surprised, however, how far they can take you when it comes to understanding your life insurance options. Ultimately, everything involving these policies boils down to these terms.
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