Glossary

The words on your policy, in plain English

Insurance documents are written for regulators first and readers second. These are the 84 terms that come up most often, defined the way we would explain them out loud — including the parts that are easy to misread.

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Showing all 84 terms.

Policy basics

The words that appear on almost every policy, application and illustration.

Death benefit: The money the insurance company pays to the people you named when the insured person dies. It is the main reason life insurance exists. Loans, withdrawals and unpaid premiums can reduce it.; See alsoFace amount Beneficiary Policy loan

Face amount: The coverage amount printed on the front of the policy, such as $500,000. It is the starting point for the death benefit, not always the final figure paid.; See alsoDeath benefit Illustration

Premium: What you pay to keep the policy in force, usually monthly or yearly. Some policies have a fixed premium; others let you vary it within limits, which also means you can underfund them.; See alsoPremium load Lapse Cost of insurance

Policy owner: The person or entity that controls the policy. The owner can change the beneficiary, take a loan, or cancel the contract. The owner is often the insured, but does not have to be.; See alsoInsured Beneficiary Insurable interest

Insured: The person whose life the policy covers. Their age, health and habits decide the price. The insured and the owner can be two different people.; See alsoPolicy owner Underwriting

Term: A type of life insurance that covers you for a set number of years, often 10, 15, 20 or 30. If you are still alive when the term ends, the coverage stops and nothing is paid.; See alsoLevel term Conversion privilege Permanent insurance

Level term: A term policy where the premium and the death benefit stay the same for the whole term. It is the most common shape, and the easiest to compare between carriers.; See alsoTerm Premium

Conversion privilege: An option in many term policies that lets you switch to permanent coverage without answering new health questions. It has a deadline, and only certain products may be available. Worth asking about before you buy, not after.; See alsoTerm Permanent insurance Underwriting

Permanent insurance: Coverage designed to last for life rather than for a set number of years, and which usually builds cash value. It costs considerably more than term for the same death benefit, and it only lasts for life if it stays adequately funded.; See alsoTerm Cash value Lapse

Lapse: What happens when a policy ends because the premium was not paid or the cash value ran out. Coverage stops. Buying again later means new underwriting at an older age.; See alsoGrace period Reinstatement Premium

Grace period: A short window after a missed payment during which the policy is still in force, commonly around 30 days. The exact length is set out in the contract and varies by state and carrier.; See alsoLapse Reinstatement

Reinstatement: Restarting a policy that has lapsed. Carriers usually require back premiums plus interest and fresh evidence of good health, and there is a time limit. It is not automatic.; See alsoLapse Grace period Underwriting

Paid-up: A policy that needs no further premiums and stays in force for a stated amount. It usually happens because the policy was funded that way or because the owner used the cash value to buy a smaller amount of guaranteed coverage.; See alsoCash value Dividend Surrender value

Free look period: A period after your policy is delivered when you can cancel and get your premium back. It is commonly 10 to 30 days depending on the state and the product. Read the policy during this window, not after it.; See alsoIllustration Contestability period

Insurable interest: The requirement that the person buying the policy would genuinely suffer a loss if the insured died. It is why you cannot insure a stranger. It normally has to exist when the policy is issued.; See alsoPolicy owner Key person insurance Buy-sell agreement

Key person insurance: A policy a business owns on someone whose loss would hurt the business, such as an owner or a lead salesperson. The business pays the premium and receives the death benefit. Tax treatment depends on how it is set up, so ask your own tax adviser.; See alsoInsurable interest Buy-sell agreement

Buy-sell agreement: A written agreement between business owners about what happens to an owner’s share if they die, leave or become disabled. Life insurance is often used to fund it so the remaining owners have cash to buy the share. The agreement itself is drafted by an attorney.; See alsoKey person insurance Insurable interest

Illustration: A printed set of numbers showing how a policy could perform under assumptions chosen when it was prepared. It is not a projection or a promise. Always read the guaranteed columns alongside the non-guaranteed ones.; See alsoGuaranteed values Non-guaranteed values Index crediting

Guaranteed values: The parts of an illustration the insurance company is contractually obliged to deliver, based on the worst charges and lowest crediting it is allowed to apply. These are the numbers to plan around.; See alsoNon-guaranteed values Illustration

Non-guaranteed values: The parts of an illustration that depend on assumptions, such as current charges or an assumed crediting rate. They can change. If a policy only works in the non-guaranteed column, that is important to know before you sign.; See alsoGuaranteed values Illustration Cost of insurance

Term life insurance: Life insurance that covers you for a set number of years. If you die during those years the death benefit is paid; if the term ends while you are alive, coverage stops and nothing is paid. It is the least expensive way to buy a given death benefit.; See alsoPermanent life insurance Conversion option Level term

Permanent life insurance: Life insurance designed to last your whole life rather than for a set term, and which normally builds cash value. It costs considerably more than term for the same death benefit, and some kinds can still lapse if they are not funded properly.; See alsoTerm life insurance Whole life insurance Indexed universal life Cash value

Conversion option: A feature in many term policies that lets you exchange some or all of the coverage for a permanent policy without answering new health questions. It has a deadline, usually an age or a number of years, and only certain products qualify. Ask what yours allows before you need it.; See alsoTerm life insurance Permanent life insurance Conversion privilege

Whole life insurance: Permanent life insurance with a premium that does not change and a cash value that grows on a schedule set out in the contract. It offers the strongest guarantees of the common options and the least flexibility.; See alsoPermanent life insurance Dividend Participating policy

Final expense insurance: A small permanent policy, usually bought to cover a funeral and the immediate costs a family faces. Underwriting is light, which makes it easier to qualify for and expensive per dollar of coverage.; See alsoGraded death benefit Simplified issue Guaranteed issue

Graded death benefit: A limitation in the first two or three years of some policies: if death is from natural causes during that window, the payout is a return of premiums plus stated interest rather than the full face amount. Accidental death is usually covered in full from day one.; See alsoFinal expense insurance Guaranteed issue Contestability period

Group life insurance: Coverage provided through an employer or association, usually at low or no cost and with little or no health underwriting. The amount is often modest, the employer can change or end the plan, and the coverage normally ends when the job does.; See alsoPortability Term life insurance

Portability: A feature of some group plans that lets you keep a version of the coverage after leaving the employer, usually at a higher cost and within a short deadline. Portability is not the same as owning an individual policy, and the terms are set by the group contract.; See alsoGroup life insurance Conversion option

Costs and charges

What you are actually paying for, and the deductions taken along the way.

Cost of insurance: The charge the insurer deducts for the pure risk of insuring your life. In most permanent policies it rises as you age. It is usually the largest single charge inside the policy.; See alsoPremium Cash value Non-guaranteed values

Premium load: A percentage taken off each premium payment before the rest goes into the policy. It covers taxes and the insurer’s expenses. It means not every dollar you pay reaches the cash value.; See alsoPremium Cash value Cost of insurance

Surrender charge: A fee the insurer deducts if you cancel a policy or take money out during the early years. It usually shrinks each year and eventually disappears. It is why the surrender value can be well below the cash value at first.; See alsoSurrender value Cash value Surrender period

Cash value

How value can build inside a permanent policy, how it is credited, and how it can be taken out.

Cash value: The amount that builds up inside a permanent policy over time. It grows from the premium left after charges, plus whatever interest or dividends are credited. In the early years it is often small or nothing at all.; See alsoSurrender value Permanent insurance Policy loan

Surrender value: What you would actually receive if you cancelled the policy today. It is the cash value minus any surrender charge and any outstanding loan. Surrendering may also create a taxable gain.; See alsoCash value Surrender charge Policy loan

Policy loan: Borrowing from the insurer using your policy’s cash value as security. Loans charge interest and reduce both the cash value and the death benefit. If the policy lapses or is surrendered with a loan outstanding, the result can be taxable.; See alsoWithdrawal Cash value Modified endowment contract (MEC)

Withdrawal: Taking money permanently out of a policy’s cash value. It reduces the death benefit, may trigger a surrender charge, and can be taxable depending on how much you have paid in and how the policy is classified.; See alsoPolicy loan Surrender charge Modified endowment contract (MEC)

Dividend: A share of a mutual insurer’s surplus that may be paid to owners of participating policies. Dividends are not guaranteed, and the amount changes from year to year. They can be taken in cash, used to reduce premiums, or used to buy more coverage.; See alsoParticipating policy Paid-up

Participating policy: A policy that is eligible to receive dividends if the insurer declares them. Eligibility is not the same as a promise; a dividend can be reduced or not paid at all.; See alsoDividend Permanent insurance

Index crediting: A method used in indexed policies where interest is linked to the movement of a market index over a set period. You do not own the index and you do not receive its dividends. The credit is shaped by a cap, a participation rate, a spread and a floor.; See alsoCap rate Participation rate Spread Floor

Cap rate: The most interest a policy will credit for a period, however well the index performs. The insurer sets it and can change it within contract limits, so a cap shown today is not a cap for life.; See alsoIndex crediting Participation rate Floor

Participation rate: The share of the index movement used to work out your credit. At a 70 percent participation rate, a 10 percent index gain is treated as 7 percent before any cap is applied.; See alsoIndex crediting Cap rate Spread

Spread: An amount subtracted from the index gain before interest is credited. With a 2 percent spread, a 10 percent gain becomes 8 percent. It is another lever the insurer can adjust within contract limits.; See alsoIndex crediting Cap rate Participation rate

Floor: The lowest interest rate a policy will credit in a period, often zero. A floor protects the credited interest from a falling index. It does not protect the cash value from policy charges, which are still deducted.; See alsoIndex crediting Cost of insurance Cap rate

Modified endowment contract (MEC): A tax classification that applies when too much premium is paid into a policy too quickly, measured by a federal test. Once a policy is a MEC it stays one, and money taken out is taxed differently, with a possible extra penalty before age 59½. Ask your own tax adviser about your situation.; See alsoPolicy loan Withdrawal 1035 exchange

1035 exchange: A provision in federal tax law that allows one life insurance or annuity contract to be exchanged for another without immediately recognising a gain. There are strict rules, and a new policy means new charges and possibly new underwriting. Do not cancel anything before a replacement is issued.; See alsoModified endowment contract (MEC)Surrender charge Underwriting

Indexed universal life: Permanent life insurance with flexible premiums, where interest credited to the cash value is linked to the movement of a market index by a formula in the contract. You do not own the index and receive no dividends from it, and the policy can lapse if it is underfunded.; See alsoPermanent life insurance Index crediting Cap rate Participation rate Floor

Surrender: Cancelling a permanent policy and taking its cash surrender value. Coverage ends, surrender charges may apply, and any gain above what you paid in is generally taxable — more so if there is an outstanding loan.; See alsoSurrender value Surrender charge Policy loan Modified endowment contract (MEC)

Modified endowment contract (MEC): A life insurance policy funded faster than federal limits allow. Distributions from a MEC are taxed on a gains-first basis and may carry an additional penalty before age 59½. Once a policy becomes a MEC it stays one, so this is checked before, not after.; See alsoPolicy loan Withdrawal Surrender

In-force illustration: An updated illustration of a policy you already own, prepared using its actual values today rather than the assumptions made when it was sold. It is the single most useful document in a policy review, and you can request one from the carrier.; See alsoIllustration Guaranteed values Non-guaranteed values

Underwriting

How an insurance company decides whether to offer coverage and at what price. None of this is an approval.

Underwriting: The insurance company’s process for deciding whether to offer you coverage, and at what price. It can look at your health, medications, family history, driving record, occupation and travel. Only the carrier can make that decision.; See alsoRate class Paramedical exam Accelerated underwriting

Rate class: The health and risk category the carrier assigns you, which sets your price. Names differ between companies, so the same label can mean different things at two carriers.; See alsoUnderwriting Table rating

Table rating: An extra charge added when a health condition puts you outside standard pricing, usually expressed as a table number or letter. It raises the premium by a set percentage. Some carriers will review it later if your health improves.; See alsoRate class Underwriting

Accelerated underwriting: A faster process where a healthy applicant may be approved using data the carrier already has, without an exam. Eligibility depends on age, coverage amount and what the data shows. A case can still be moved to full underwriting.; See alsoUnderwriting Paramedical exam Simplified issue

Simplified issue: Coverage offered on the strength of a short set of health questions, with no medical exam. Amounts are usually smaller and the price per dollar of coverage is higher. Answers are still verified, and a decline is still possible.; See alsoGuaranteed issue Accelerated underwriting

Guaranteed issue: A policy issued without health questions to anyone within the stated age range. Coverage amounts are small, the cost per dollar is high, and there is normally a waiting period of two or three years before the full death benefit is payable.; See alsoSimplified issue Contestability period

Paramedical exam: A short health check arranged by the insurer, usually at your home or work. It typically covers height, weight, blood pressure and blood or urine samples. It is paid for by the carrier.; See alsoUnderwriting Attending physician statement

Attending physician statement: A summary of your medical records requested from your doctor, with your written permission. It is the most common reason an application takes weeks rather than days.; See alsoUnderwriting Paramedical exam MIB

MIB: A member-owned information exchange that insurers use to check for material differences between what you disclose now and what you disclosed on past applications. It holds coded information, not your full medical file. You have the right to request your own record.; See alsoUnderwriting Attending physician statement Contestability period

Contestability period: Usually the first two years a policy is in force, during which the insurer can investigate a claim and deny it if the application contained a material misstatement. After it passes, the grounds for contesting a claim are much narrower.; See alsoSuicide clause Underwriting Free look period

Suicide clause: A standard provision stating that if the insured dies by suicide within a set period after issue, usually two years, the insurer returns the premiums paid instead of the death benefit. The exact period is set by the contract and state law.; See alsoContestability period

Riders and living benefits

Optional add-ons that change what a policy does, usually with conditions attached.

Rider: An optional addition to a policy that changes what it does. Some are included at no extra cost, some are paid for. Availability varies by carrier, product and state.; See alsoAccelerated death benefit Waiver of premium Child rider

Accelerated death benefit: A rider that may let you take part of the death benefit while you are alive if you meet a defined condition. Anything you take reduces, and may eliminate, what your beneficiaries receive. It may also affect eligibility for public assistance and may have tax consequences.; See alsoChronic illness rider Critical illness rider Terminal illness rider

Chronic illness rider: A living benefit that may pay early if you cannot perform a set number of daily activities, or need substantial supervision, as defined in the rider. The definitions are strict and differ between carriers, so read them rather than the brochure.; See alsoAccelerated death benefit Critical illness rider

Critical illness rider: A living benefit that may pay early after a listed condition such as a heart attack, stroke or certain cancers. Only the conditions named in the rider count, and the payment amount depends on the carrier’s own assessment.; See alsoAccelerated death benefit Chronic illness rider

Terminal illness rider: A living benefit that may pay part of the death benefit early if a physician certifies a life expectancy shorter than a stated period, often 12 or 24 months. It is the most commonly included of the living benefits.; See alsoAccelerated death benefit Chronic illness rider

Waiver of premium: A rider that pays your premiums for you if you become disabled under the rider’s definition. The definition of disability, the waiting period and the age limits all matter more than the headline.; See alsoRider Premium

Child rider: A small amount of coverage on your children added to your own policy, usually for one flat cost regardless of how many children you have. Many can be converted to a policy the child owns as an adult.; See alsoRider Conversion privilege

Activities of daily living (ADLs): A standard list — typically bathing, dressing, eating, transferring, toileting and continence — used in chronic illness and long-term care definitions. Being unable to perform a stated number of them is often what triggers a benefit. The exact list and threshold are set by the rider, not by common sense.; See alsoChronic illness rider Accelerated death benefit

Beneficiaries

Who receives the money, and the wording that decides what happens if they do not.

Beneficiary: The person, people or entity you name to receive the death benefit. The designation on the policy generally controls, even if your will says something different. Review it after any major life change.; See alsoContingent beneficiary Per stirpes Will

Contingent beneficiary: The backup. They receive the death benefit only if no primary beneficiary is alive to receive it. Leaving this blank is one of the most common and most avoidable mistakes on a policy.; See alsoBeneficiary Probate

Per stirpes: Wording that sends a deceased beneficiary’s share down to their own children. If you name three children per stirpes and one dies before you, that child’s share goes to their children rather than to your other two.; See alsoPer capita Beneficiary

Per capita: Wording that divides the money only among the named beneficiaries who are still living. Using the same example, the surviving two children would split the whole amount and the grandchildren would receive nothing.; See alsoPer stirpes Beneficiary

Irrevocable beneficiary: A beneficiary who cannot be removed or changed without their written consent. It is sometimes required by a divorce decree or a business agreement. Check whether any of your designations are irrevocable before assuming you can update them.; See alsoBeneficiary Contingent beneficiary

Certified death certificate: An official copy of a death certificate issued by the vital records office, with a raised seal or equivalent. Insurers require a certified copy rather than a photocopy, and it is worth ordering several at once because other institutions will each want one.; See alsoBeneficiary Death benefit

Collateral assignment: A formal arrangement pledging part of a policy’s death benefit to a lender as security for a loan. The lender is paid what it is owed first and the remainder goes to your beneficiaries. It is not the same as naming the lender as beneficiary.; See alsoBeneficiary Policy owner Insurable interest

Wills, trusts and estate

Documents that sit around a policy. These are legal matters, handled by a licensed attorney.

Will: A legal document that says who receives the property you own in your own name, and who you want as guardian for minor children. It does not control assets with their own beneficiary designation, such as a life insurance policy.; See alsoProbate Guardian Beneficiary

Revocable living trust: A trust you create during your lifetime and can change or cancel while you are alive. Assets properly moved into it generally avoid probate. It offers little asset protection precisely because you keep control.; See alsoIrrevocable trust Probate Will

Irrevocable trust: A trust you generally cannot change or undo once it is created. Giving up that control is the point, and it is used for specific tax or protection reasons. This is squarely attorney territory.; See alsoRevocable living trust Probate

Probate: The court process for settling what a person owned in their own name after they die. It takes time, costs money and is usually a public record. Life insurance paid to a named living beneficiary normally passes outside it.; See alsoWill Revocable living trust Contingent beneficiary

Guardian: The adult a court appoints to raise your minor children if both parents die. Naming your choice in a will is the ordinary way to tell the court what you want. Without one, the decision is made without your input.; See alsoWill Child rider

Durable power of attorney: A document naming someone to handle your financial and legal affairs if you cannot. "Durable" means it stays effective if you become incapacitated. It ends at your death, when the will takes over.; See alsoHealthcare directive Will

Healthcare directive: A document naming who makes medical decisions for you if you cannot, and recording your wishes about treatment. Names and rules differ by state, including living will and healthcare proxy.; See alsoDurable power of attorney Will

Cross-purchase agreement: A buy-sell arrangement in which the owners of a business each agree to buy a departing owner’s share personally, often funded with life insurance each owner holds on the others. The alternative structure has the business itself buy the share. Which suits you is a question for your attorney and CPA.; See alsoBuy-sell agreement Key person insurance

Annuities

Long-term insurance contracts used for income rather than for a death benefit.

Annuity: A long-term contract with an insurance company, usually bought to provide income later. Guarantees depend on the claims-paying ability of the insurer. Annuities carry fees and withdrawal limits, and they are not an emergency fund.; See alsoSurrender period 1035 exchange

Surrender period: The number of years during which taking more than the allowed amount out of an annuity triggers a charge. Periods are commonly several years long and the charge falls over time. Check it before you commit money you may need sooner.; See alsoAnnuity Surrender charge

Important information

Educational information. The information on this page is general and educational. It is not insurance, tax or legal advice, and it is not a recommendation to buy, keep, change or cancel any policy. Your own situation may lead to a different conclusion. Please talk with a licensed professional before acting.

Product availability. Products, riders and features are offered by the issuing insurance company, not by Quantum Family Wealth. Availability, names, costs and terms vary by carrier and by state, and can change. Not every product described here is available to every applicant.

Tax and legal information. Quantum Family Wealth does not provide tax or legal advice. Tax treatment depends on how a policy is structured, whether it stays in force, your individual circumstances and applicable law, all of which can change. Please consult your own qualified tax adviser and attorney.