The insured is the person whose life is covered by a life insurance policy.
The policy owner is the person who has the right to make changes to the insurance contract. They are responsible for making payments on the insurance policy and designating beneficiaries. The owner of a permanent life insurance policy also has access to the policy’s cash value. Most often, this is the same person as the insured, but it can also be another person, such as a spouse, who would suffer financial loss if the insured were to die
A beneficiary of a life insurance policy is a designated recipient of the policy’s death benefit.
The premium of a life insurance policy is the payment or series of payments that the policy owner makes to keep the policy in effect.
The face amount of a life insurance policy commonly refers to the coverage amount. It does not include any additional benefits that might be payable via riders or other additional provisions.
A participating policy is a permanent life insurance policy that provides the opportunity for owners to earn dividends.[*] Dividends are additional earnings that may accrue in a permanent life insurance policy, depending on the performance of the issuing company.
A mutual insurance company is one that is 100% owned by its policy owners, who, as a result, may earn dividends. A stock company, on the other hand, is co-owned by and pays any dividends to its shareholders.
Term life insurance is a life insurance policy that is in effect for a set period of years. If a term life policy’s insured dies within the term, its beneficiaries are entitled to receive the death benefit; if the policy’s term expires while the insured is living, its value disappears.
Whole life insurance provides permanent coverage for the duration of the insured’s life. These funds can be accessed during the duration of the policy. Whole life insurance can be purchased with either a single lump-sum payment or with a series of level premium payments.
Preneed insurance covers the cost of funeral arrangements. The insured makes their own arrangements ahead of time with a funeral home, and the premium amount covers the costs of all selected services. Premiums for preneed policies can be paid with either a single payment or a series of payments.
Universal life insurance is a type of permanent life insurance that offers both a death benefit and a cash value portion. Premiums of a universal life insurance policy may be flexible, allowing policy owners to determine how much to fund the policy’s cash value.
An annuity is a tax-advantaged product that offers a future stream of guaranteed income in exchange for a single lump-sum payment or series of payments. The annuity may begin paying the income stream immediately or, in the case of a deferred annuity, after a specified period of growth.
A rider is an add-on option of an insurance policy that modifies its terms to fit the policy owner’s needs more closely. Riders can provide additional benefits or coverage and may be available for additional premiums or included in a policy free of charge, but they are subject to underwriting.
Underwriting is the process that insurance companies use to evaluate the risk of insuring an individual. Different types of life insurance policies require different levels of underwriting. In general, the more the insurance company knows about the risk it’s assuming, the more competitively it can price its policies.
A guaranteed issue life insurance policy does not require applicants to answer health questions or submit to a physical examination. These types of policies tend to come with high premiums and low coverage amounts. Additionally, the death benefit may be available only if the insured dies after the policy has been in effect for a specified period of time (commonly two to three years). ELCO’s Preneed Advantage product, for example, is guaranteed issue.
A simplified issue policy requires applicants to answer some basic health screening questions to qualify. Because this allows them to screen out certain high-risk applicants, insurers can offer simplified issue policies for more competitive rates than guaranteed issue policies. All of ELCO’s life insurance products are simplified issue.
A fully underwritten life insurance policy requires that applicants submit to a detailed health history review and medical examination to assess their risk. For applicants who are in excellent health and have an uncomplicated medical history, this may be the most cost-effective option available. However, those who have evidence of medical issues may not qualify.
The contestability period is a contract provision that protects insurance companies from fraud. This is the time when the insurance company may review the initial application to determine whether any material misrepresentations were made. It typically lasts one to two years after a policy is issued
The free look period is the period of time after a policy takes effect when the policy owner can cancel it without penalty. This allows policy owners time to review policy documents in detail before being fully bound by the insurance contract.
To take out a life insurance policy on another person, you must have an insurable interest in their life, meaning that you would suffer financial harm in the event of their death.
If life insurance premiums are not paid as agreed, the policy can lapse, putting the policy owner at risk of losing life insurance protection. In permanent life insurance policies, the cash value may be used to prevent lapse.
Level and modified benefits apply to final expense insurance, which is designed to pay for not only funeral expenses but also other costs related to the end of life, such as final medical expenses, travel expenses for family members, or anything else an insured’s loved ones may need. Level-benefit final expense policies provide an immediate full death benefit, while modified-benefit policies provide a lower immediate benefit, which increases over time until the full benefit amount is reached.
The net amount at risk in a permanent insurance contract is the difference between the death benefit amount and the premiums that the policy owner has paid to the insurer. The amount at risk is zero when the policy is fully paid up.
A non-forfeiture option is a feature of permanent life insurance that allows the policy owner to use the cash value of a life insurance policy. This helps protect policy owners from losing insurance protection in the event they can’t keep up with premium payments.
It’s possible to take a loan from a permanent life insurance policy. No credit check is required, and you don’t necessarily have to pay the loan back; however, any unpaid policy loan amount plus accrued interest will ultimately be deducted from the policy’s death benefit.
Table ratings are a tool that insurers use to account for additional risk factors. The insurance company adds a certain percentage to the standard premium to account for specific levels of risk.
Reinstatement is the process of re-activating a lapsed life insurance policy. It requires the policy owner to pay all past-due premiums plus interest. Premiums may also be higher following reinstatement, and additional underwriting may be required.
Medicaid is a government program that helps cover medical costs for low-income, low-asset individuals.
Evidence of insurability is proof that an applicant qualifies for the coverage they are seeking.
Section 1035 of the Internal Revenue Code allows owners of certain insurance products, such as life insurance policies and annuities, to make specific exchanges without tax consequences. The rules around 1035 exchange are complex, however, so it’s important to get the advice of a tax professional when considering this move.
*Dividends are not guaranteed.
** An accelerated death benefit rider is a life insurance product, not a long-term care product