Eleven essential life insurance terms everyone should know
Life insurance buyers face an obstacle: They have to cut through a thicket of jargon that the insurance industry has been using for decades. For example, an 鈥渁ccelerated death benefit鈥� might not sound very appealing, but if you鈥檙e getting听听it鈥檚 a good thing to ask for.
Confusing terminology often prevents people from making a decision, and as a result may leave their family without a life insurance safety net. There are about 19 million consumers who want to buy life insurance but can鈥檛 find their way through the confusing language, according to a 2014 study by consulting firm Maddock Douglas and LIMRA, a financial services research group.
Those who do buy life insurance don鈥檛 necessarily comprehend what they鈥檝e purchased. 听In a 2015 survey from J.D. Power, 46% of respondents acknowledged that they didn鈥檛 completely understand their policies. If that鈥檚 the case, they may not have bought the proper coverage.
鈥淭he only way you鈥檙e going to know if it鈥檚 the right product is if you understand it,鈥� says Valerie Monet, director of J.D. Power鈥檚 insurance practice.
Here are some must-know terms.
1.听Policy owner:听The person who buys and controls the insurance policy. The policy owner may or may not be the one whose life is insured. For example, a wife could own a policy on her husband. The policy owner is the only one who can change the beneficiary and get policy details from the insurer.
2.听Premium:听The amount of money you pay for insurance, generally quoted per month or per year. Check NerdWallet鈥檚听听to get an idea of typical premiums.
3.听Beneficiary:听The person who receives the life insurance payout. You can name more than one beneficiary, and you can designate a specific percentage for each beneficiary. For example: 70% to Kayla and 30% to Jack.
4.听Death benefit:听The life insurance money that is paid to the beneficiary.
5.听Insured person:听The person whose life is being insured.
6. Term life insurance:听This type of policy lasts for a specific number of years. You select the term, such as five, 10, 20 or 30 years.
7.听Permanent life insurance:听This type of policy lasts for your entire life and also has a cash value component. There are multiple varieties of permanent life, including whole life, universal life, variable life and variable universal life. If you decide to buy permanent life insurance, work with a financial advisor and be sure you understand听听before you buy.
8.听Cash value:听If you buy permanent life insurance, part of your payment goes into a 鈥渃ash value鈥� account that grows in value over time. You can take a loan against the cash value and use the money for anything you like.
9.听Accelerated death benefit:听This policy feature allows you to receive some of the life insurance payout early if you are terminally ill. Some insurers now call this a 鈥渓iving benefit.鈥� It鈥檚 usually a free feature, so make sure your policy has it.
10. Rider:听An add-on that provides an additional feature or coverage at extra cost. For example, with a 鈥渨aiver of premium鈥� rider you don鈥檛 have to pay for your life insurance if you become totally disabled and can鈥檛 work.
鈥淚magine a life insurance policy is like buying a car, and a rider like all the accessories the dealer offers you. Do you need it? It鈥檚 up to you to decide,鈥� says听of O鈥機onnor Wealth Management in Pasadena, California.
11.听Underwriting:听This is the process by which insurance companies evaluate the risk of insuring you and determine your life insurance rate. It often includes accessing your medical records, driving record and prescription drug history.
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