The words on your policy.

0–9

1035 exchange

A swap of one life insurance policy or annuity for another that moves the cash value across without triggering income tax, under Section 1035 of the tax code. The money has to go carrier to carrier. Take a check yourself and the exchange is broken.

A

Accelerated death benefit

A provision that lets the insured draw part of the death benefit while still alive after a qualifying diagnosis, usually terminal or chronic illness. Whatever is drawn is subtracted from what the beneficiary receives.

Accidental death benefit

A rider that pays an extra amount if death results from an accident. It pays nothing for death from illness, which is what most claims are.

Age nearest birthday

A pricing method that rounds the applicant’s age to whichever birthday is closer. Someone seven months past their 45th birthday is priced as 46. Other carriers use age last birthday, which is why the same person gets two different ages from two companies.

Annuitant

The person whose life an annuity is measured against. Payments that last for life last for the annuitant’s life, and the annuitant is not always the owner.

Annuity

A contract with an insurance carrier that converts a sum of money into income, either immediately or at a chosen date. The carrier takes on the risk that the income lasts longer than the money would have. Read more

Assignment

A transfer of ownership rights in a policy to someone else. A collateral assignment gives a lender a claim on the proceeds up to the balance of a loan; an absolute assignment hands the policy over entirely.

Attained age

The insured’s age at a given moment during the life of the policy, as opposed to the age at which it was issued. Conversion and renewal provisions are usually priced at attained age.

B

Beneficiary

The person or entity named on the carrier’s form to receive the death benefit. The form controls, not the will. Read more

Build chart

The carrier’s table of acceptable height and weight combinations by rate class. Every carrier publishes its own, and they do not match, which is why one company’s Preferred is another’s Standard.

C

Cap rate

The ceiling on index-linked interest an indexed policy will credit in a given period. A 9 percent cap means a 14 percent index gain credits 9 percent.

Carrier

The insurance company that underwrites the application, issues the policy and pays the claim. An independent firm places business with many carriers; a captive agent writes for one.

Cash surrender value

What the owner actually receives on canceling a permanent policy: the cash value less any surrender charge and any outstanding loan.

Cash value

The account inside a permanent policy that grows over time and that the owner can borrow against or surrender. Term insurance has none.

Contestability period

The window, usually the first two years, during which a carrier can investigate a claim and rescind the policy for a material misstatement on the application. After it closes the carrier generally cannot go back. Read more

Contingent beneficiary

The person who receives the death benefit if the primary beneficiary has already died. With no contingent named, the money usually falls to the estate and into probate.

Conversion privilege

A right built into most term policies to exchange them for permanent coverage without a new medical exam. It is limited by a deadline and sometimes by which products qualify.

Cost of insurance

The monthly charge a universal life policy deducts for the pure insurance component. It rises with the insured’s age, and it is what quietly drains a policy that is underfunded.

D

Death benefit

The amount the carrier pays the beneficiary when the insured dies, less any outstanding policy loan.

Decreasing term

Term insurance whose death benefit falls over the policy’s life while the premium stays level. Usually sold against a mortgage balance.

Dividend

A return of surplus paid by a mutual carrier to whole life policyholders. It is not guaranteed, and it is treated as a return of premium rather than income for tax.

E

Endorsement

A written change attached to a policy that alters its terms. Same thing as a rider in most contracts.

Evidence of insurability

Proof of health that a carrier requires before issuing or increasing coverage. Usually an application and often an exam, labs or medical records.

Exclusion

A cause of death the policy will not pay for. The common ones are suicide inside the first two years and death while committing a felony. Read more

F

Face amount

The stated death benefit on the policy schedule. On some universal life designs the amount actually paid is the face amount plus the account value.

Fact-finder

The structured conversation a producer has before recommending anything: income, debt, dependents, existing coverage, health, and what the money is meant to do. Several states require the answers to be written down. Read more

Final expense

Small permanent policies, usually $5,000 to $25,000, written with simplified underwriting and no exam, meant to cover a funeral and the bills that land in the same month. Read more

Fixed annuity

An annuity that credits a rate the carrier declares, with the principal guaranteed by the carrier. The rate can change after any guarantee period ends.

Free look period

The days after delivery during which the owner can cancel a new policy and get every dollar of premium back. Ten days in most states, longer in some and for some products.

G

Grace period

The time after a missed premium during which the policy stays in force, usually 31 days. Miss the grace period and the policy lapses.

Guaranteed issue

Coverage a carrier must issue with no health questions at all. It costs the most and almost always carries a graded death benefit for the first two or three years.

Guaranteed universal life

Universal life priced to hold a guaranteed death benefit to a stated age, often 90, 95 or 121, with little or no cash value by design. Effectively permanent coverage at close to term pricing.

Guaranty association

The state body that steps in when a carrier becomes insolvent, up to statutory limits that vary by state. It is a backstop, not a guarantee, and it is not a government agency.

H

Human life value

A way of sizing coverage from the present value of the income the insured would have earned over a working life, rather than from a multiple of salary. Read more

I

Immediate annuity

An annuity that begins paying within about a year of purchase. Bought with a single sum, usually to convert savings into income that cannot be outlived.

Incontestability clause

The provision that closes the contestability period. After it runs, the carrier pays on the contract as written except in cases of outright fraud in the states that allow that exception.

Indexed universal life

Universal life whose interest is linked to the movement of a market index, subject to a floor, a cap and a participation rate. The policy does not own the index and receives no dividends from it. Read more

Insurable interest

The requirement that the person buying a policy would suffer a real loss if the insured died. It has to exist when the policy is issued, not when the claim is made.

Irrevocable beneficiary

A beneficiary who cannot be removed or changed without their written consent. Often the result of a divorce decree.

Irrevocable life insurance trust

A trust that owns a policy so the death benefit sits outside the insured’s taxable estate. Move an existing policy into one and the three-year rule can pull it back if the insured dies inside three years. Read more

J

Joint and survivor

An annuity payout that continues, in full or at a reduced rate, for as long as either of two people is alive.

L

Lapse

The end of a policy for non-payment after the grace period runs out. Coverage stops and, on a permanent policy, an outstanding loan can trigger a tax bill.

Level term

Term insurance with a death benefit and a premium that both stay flat for the whole term. The most common shape sold.

Living benefit rider

Any rider that pays out while the insured is alive, most often on a terminal, chronic or critical illness diagnosis.

M

Modified endowment contract

A permanent policy funded so fast that it fails a federal seven-pay test. Death benefit stays tax-free, but withdrawals and loans are taxed as income first and can carry a penalty before age 59 and a half. The classification is permanent.

N

Non-forfeiture options

The choices a whole life owner has instead of simply canceling: take the cash, take reduced paid-up insurance, or take extended term coverage.

O

Owner

The person or entity that controls the policy: pays the premium, names the beneficiary, borrows against the cash value and can surrender it. Often but not always the insured.

P

Paid-up additions

Small blocks of fully paid whole life bought with dividends. They add death benefit and cash value and then earn dividends themselves.

Participation rate

The share of an index’s gain an indexed policy credits before any cap applies. At an 80 percent participation rate, a 10 percent index gain becomes 8 percent.

Per stirpes

A beneficiary instruction that sends a deceased beneficiary’s share down to their own children rather than splitting it among the surviving beneficiaries. Per capita does the opposite.

Persistency

The share of policies still in force after a given period. Carriers watch it closely, because business that lapses early costs them money.

Policy loan

Money borrowed against a permanent policy’s cash value. Interest accrues, no repayment schedule applies, and whatever is unpaid at death comes out of the death benefit. Read more

Preferred Plus

The best rate class most carriers publish, for applicants with clean labs, good build, no tobacco and no family history of early cardiac or cancer death. Names vary: Preferred Elite, Super Preferred, Preferred Best.

Premium

What the owner pays to keep the policy in force. On term it is fixed. On universal life it is flexible within limits, and paying the minimum is how policies quietly fail.

Probate

The court process that settles an estate and distributes property under a will or state law. Life insurance with a living named beneficiary skips it entirely. Read more

Producer

The licensed individual who takes the application and services the policy. The formal term for what most people call an agent.

R

Rate class

The pricing bucket a carrier assigns after underwriting, from Preferred Plus down through Standard and into table ratings. It is the single biggest driver of what a policy costs. Read more

Reinstatement

Putting a lapsed policy back in force, usually within three to five years, by paying the back premium with interest and proving insurability again.

Replacement

Ending or reducing one policy to buy another. Every state regulates it, requires disclosure forms, and gives the existing carrier a chance to respond.

Return of premium

A term design that refunds the premiums paid if the insured survives the term. It costs substantially more than plain level term for the same death benefit.

Rider

An add-on that changes what a policy does. Waiver of premium, child term, accelerated death benefit and accidental death are the common ones.

S

Simplified issue

Underwriting with a short health questionnaire and no exam or labs. Faster and more forgiving than full underwriting, and priced accordingly.

Spread

An amount subtracted from index-linked interest before it is credited, used by some indexed products in place of or alongside a cap.

Suicide clause

The provision excluding death by suicide for the first two years, one year in a few states. The carrier returns the premiums paid rather than the death benefit.

Surrender charge

A fee the carrier deducts if a permanent policy or annuity is cashed in during its early years. It usually steps down to zero over a schedule of several years.

T

Table rating

A rating above Standard, expressed as a table or a letter, that adds a percentage to the base premium for a health or occupational risk. Table 2 typically adds about 50 percent. Read more

Term life

Insurance that covers a stated number of years and pays only if the insured dies inside them. No cash value, and the cheapest way to buy a large death benefit. Read more

U

Underwriting

The carrier’s assessment of an applicant: application answers, labs, build, prescription history, driving record and medical records, ending in a rate class or a decline. Read more

Universal life

Permanent insurance with a flexible premium and a cash value account charged monthly for the cost of insurance. Flexible enough to be useful and flexible enough to be underfunded into a lapse.

W

Waiver of premium

A rider that keeps the policy in force by paying the premiums if the insured becomes disabled, after a waiting period and under the rider’s own definition of disability.

Whole life

Permanent insurance with a premium that never changes, a guaranteed death benefit and a guaranteed cash value schedule. Mutual carriers may also pay dividends, which are not guaranteed. Read more

Withdrawal

Taking money out of a universal life policy or annuity permanently, as opposed to borrowing it. It reduces the account value and usually the death benefit, and it can be taxable.