Life Insurance Key Terms You Should Know

Policy Owner

The policy owner purchases the policy and is responsible for keeping up with the payments. They also have control over the policy and can access its benefits, change beneficiaries, or cancel it.

Insured

The insured is the individual on whom the policy provides life coverage. If the insured passes away while the policy is in effect, a claim can be made to receive death benefit proceeds.

Beneficiary

The beneficiary is the entity or person that will receive the payout upon the death of the insured.

A beneficiary can be a single person, such as a spouse or child, or multiple individuals, each assigned different percentages of the face amount until the total death benefit reaches 100%. A beneficiary can also be an organization or a charity that would receive the money from your life insurance policy when you die.

Contingent Beneficiary

(Could also be called Secondary Beneficiary, Other Beneficiary)

Contingent beneficiary is the back-up person or entity you name to receive your life insurance payout when you die if the primary beneficiary is unable or unwilling to accept it.

Insurable Interest

Insurable interest is required when buying life insurance on another person.

This situation exists when one individual can prove that the death of another individual would affect the person financially.

For example, spouses typically rely on one another’s income; therefore, one spouse has an insurable interest in the other spouse. Conversely, your neighbor is not financially dependent on your income, they lack insurable interest and cannot obtain life insurance on you.

Inforce

Inforce means the life insurance policy is active. If the insured dies while the policy is inforce, the insurance company pays a death benefit to the policy’s beneficiary.

Contestability Period

The contestability period is the time in which the insurance company has a right to investigate and dispute the validity of statements made on the application, if the insured dies during this time. If misrepresentations are discovered, the insurance company can make a case against paying the death benefit claim.

The contestability period typically lasts two years and begins immediately when you first purchase the life insurance policy.

Material Misrepresentation

Material misrepresentation is a factually incorrect statement, whether made intentionally or not, on a life insurance application. If material representations are discovered during the contestability period after a death benefit claim is made, the insurance company has the right to deny payment.

Free Look Period

When you buy a life insurance policy, the policy owner has a free look period to review the policy and return it for a full refund if they decide they no longer want the coverage. This period is usually 30 days.

Grace Period

The grace period is a length of time between the policy’s premium due date and the date the policy will lapse if the premium goes unpaid. This period is usually 30 days. If the insured dies during this period, the death benefit (minus the unpaid premium) will still be paid to the beneficiaries.

Risk Class

(Could also be called Rate Class, Classification, UW Class, Health Classification)

Risk class is the health classification the insurance companies place you in for pricing purposes based on your height and weight, tobacco use, family health history, and your personal medical history.

The insurance company essentially determines how much of a risk you would be to insure and then assigns you to a risk class accordingly—this process is called underwriting.

If you’re a tobacco user, you will most likely be given a tobacco risk class—which comes with higher premium pricing than their non-tobacco counterparts. Some insurance companies are more lenient with certain types of tobacco use, like celebratory cigar use or chewing tobacco.

Sometimes different insurance companies have different names for the same risk class. Below are examples of different ways these companies name their classifications.

(Best) Preferred Plus Non-Tobacco is the same as Preferred Best Non-Tobacco, Super Preferred Non-Tobacco, Preferred Elite Non-Tobacco, Select Preferred Non-Tobacco, and Premier Non-Tobacco: the name simply depends which life insurance company is being worked with.
(Second Best) Preferred Non-Tobacco, Preferred Best Non-Tobacco, Super Preferred Non-Tobacco, Elite Non-Tobacco
(Third Best) Standard Plus Non-Tobacco, Preferred Non-Tobacco, Select Non-Tobacco, Super Standard Non-Tobacco
(Fourth Best) Standard Non-Tobacco, Non-Tobacco

Tobacco Risk Classes:

(Fifth Best) Preferred Tobacco
(Sixth Best) Standard Tobacco, Tobacco, Tobacco Standard

Substandard Risk Class

When a proposed insured is considered by the life insurance company to be high risk, he or she may be classified as substandard risk. Substandard risk offers often include either table rating an applicant or adding a flat extra to the premium.

A table rating requires a policy owner to pay a certain percentage on top of the standard rate.

A flat extra is an extra dollar amount per $1,000 of insurance coverage a policy owner may be required to pay to cushion extra risk the carrier takes on.

Underwriting

Underwriting is the process of reviewing your application based on guidelines set by each insurance company, ultimately to determine your final price and risk to the insurance company you choose.

Underwriting for life insurance usually consists of reviewing your answers to health questions, your height and weight, the results from a medical exam, driving record, and financial history.

Rider

Rider is a term used for any additional benefits or options you can add onto your policy. For example, a waiver of premium rider is an additional feature you can add to your policy to relieve you of your payments if you become disabled and can’t work.

Cash Value

If you have a permanent policy, like whole life or universal life insurance, a portion of each premium payment funnels into a cash value account that earns interest.

Policy owners can access these funds via policy loans or withdrawals, depending on the policy terms.

Surrender Value

If you have a permanent policy with a cash value account, the surrender value is what your policy is worth should you decide to cancel, or surrender, your policy.

The surrender value is typically equivalent to the cash value minus any outstanding loans and fees.

Dividends

Life insurance companies may find themselves with more profits than anticipated, such as when fewer policyholders pass away or when the company’s investments outperform expectations. In such instances, the company may distribute a portion of the surplus to customers with eligible policies. These policies are known as “participating,” and the distributed funds are referred to as dividends.

These dividends can be received as cash, used to reduce your premium, added to your cash value account, or utilized to acquire additional life insurance coverage, known as “paid-up” coverage.

Understanding commonly used life insurance definitions is the first step toward getting the coverage you need.

Trust the experts at Quotacy to provide you with accurate term life insurance quotes to help you make the best decision for your family.

Explore more terms and answers to frequently asked questions: Life Insurance Terminology and FAQs