Life Insurance Terms Glossary

Life Insurance Definitions

When it comes to protecting what matters most, life insurance is an easy and proactive way to ensure you're financially taking care of your loved ones. But, sometimes the insurance jargon can be confusing — we're here to help. Browse our glossary of common life insurance terms to clear up any confusion and better understand how life insurance works. Still have questions? Your American Family agent is the perfect person to ask!


A

Advanced premium. A pre-paid premium, where a premium payment is made before it’s due. The money is typically held in an account by the insurance company and then paid to the policy when the premium is due.

Amount of insurance. The amount of coverage purchased. Also called face amount.

Annual renewable term. A form of term life insurance that automatically renews on a yearly basis with increasing premiums.

Application. When applying for life insurance, you’ll fill out a statement of information which will be used by the company to assess your risk. This, along with other underwriting factors, will determine your underwriting classification, premium, and eligibility.


B

Beneficiary. A person(s) or entity named in the life insurance policy that receives the death benefit upon the death of the insured. Find out more about beneficiaries.


C

Cash value. The amount of money that accumulates in a permanent life insurance policy from which a loan or partial surrender can be made*. Unpaid loans and any accrued interest may affect the death benefit.

Cash surrender value. The amount of money the insurance company pays you if you voluntarily terminate the policy before your death or before the policy matures.

Conversion. When all or some of your term life insurance is exchanged into a permanent life insurance policy. Read more about when to convert term to whole life insurance.


D

Death benefit. The amount of money to be paid to the beneficiary upon the death of the insured.

Direct response. When insurance is sold directly to you by an insurance company via phone, mail, or the Internet.

Dividend. A portion of a company’s profits that may be paid to policyholders in conjunction with a life insurance policy. Typically seen on whole life policies, dividends are a partial return of premium and are not guaranteed.


E

Endorsement. An add-on coverage to your life insurance policy that provides additional benefits or exclusions. An endorsement may require additional premium. Also known as a rider.

Extended term insurance. If you do not pay your premiums, an insurance company can take your cash value in your policy and use it to purchase term insurance. You would then be covered for a specific amount of time depending on how much your cash value was at the time of forfeiture. Only available on whole life policies.


F

Face amount. The amount of coverage purchased. Also called amount of insurance.

Final expenses. Expenses that incur at the time of a person’s death, including funeral costs, current bills or debt. Your life insurance policy can help cover final expense costs.


G

Grace period. The amount of time after the premium due date when a premium payment can be made without your insurance policy lapsing.


I

Illustration. A hypothetical representation of how a company computes policy results.

Insured. The person(s) covered under the life insurance policy.


L

Lapse. When a life insurance policy becomes inactive due to nonpayment.

Life expectancy. The age to which a person is expected to live. Life expectancy is considered when determining your premium.

Life insurance. A contract with an insurance company that, in exchange for premium payments, provides a sum of money, known as a death benefit, to beneficiaries upon the insured’s death.

Limited pay. A type of whole life insurance, where premiums are paid only for a limited number of years. Your coverage will still last a lifetime, if no loans are unpaid.


N

Non-forfeiture options. A policy provision specifying how the policy cash value can be applied if the policy owner stops making payments. (See paid up insurance, extended term insurance, and surrender.)


P

Paid-up insurance. Amount of permanent life insurance available with no premium payments due; after the cash value accrues enough to cover the premium payments.

Participating vs non-participating policy. A participating policy is a policy that could receive dividends from a life insurance company. A non-participating policy does not receive dividends.

Policy. The contract between the policyowner and the company.

Policy loan. A loan issued by the life insurance company that uses the cash value of your life insurance policy as collateral. Loans are charged an interest rate and outstanding loans or unpaid interest may affect the death benefit. In addition, failure to pay the loan balance could result in policy termination.

Policyowner. The person who owns the insurance policy. Usually, the person covered by the policy, though you may own a policy that names someone else as the insured. Also known as the policyholder.

Premium. The periodic payment you make to your insurance company to keep the policy active.


R

Reinstatement. The ability to re-activate your life insurance policy after it has lapsed; subject to review and approval.

Rider. An add-on coverage to your life insurance policy that provides additional benefits or exclusions. A rider may require additional premium. Also known as an endorsement.


S

Settlement options. How the death benefit is paid to the beneficiaries. Usually a lump sum but can also be paid in installments.

Standard risk. Refers to a risk that a life insurance company considers common or normal, which would qualify you for a standard rate.

Surrender. A full cancellation of your insurance policy.


T

Term life insurance. Provides coverage for a certain time period — or term — such as 10, 20 or 30 years. The death benefit will be paid to the beneficiary(ies) if you pass during the term. Check out our SimplyProtected and Term Life insurance policies.


U

Underwriter. The person who evaluates you for potential risks and exposures in order to determine the risk classification and whether or not to insure you.

Underwriting. The process used to assess your eligibility to purchase insurance and your risk classification.

Underwriting class. The category you’re placed into based on your risk, which includes, but is not limited to, things like your age, gender, and health and lifestyle choices. The underwriting rating class/category impacts your premium. Also may be called rating or risk classification.

Universal life insurance. A type of permanent life insurance that offers flexible payments, an adjustable death benefit, and the cash value element of whole life insurance. Check out our MyLife Flexible policy.


W

Whole life insurance. A type of permanent coverage that has fixed premiums, a fixed death benefit, and guaranteed cash value. Policy may receive dividends. Check out our Whole Life insurance policy.


Policy Form L-36 10, Policy Form L-36 20, Policy Form L-36 30, Policy Form L-33, Policy Form L-34, Policy Form L-35, Policy Form ICC13-97 UL, Policy Form L-97 UL (AZ, ND, SD only), Policy Form L-24 (10), Policy Form L-24 (20), Policy Form L-24 (30), Policy Form L-60

*Disclaimer: Any loans taken from your life insurance policy will accrue interest. An outstanding loan balance (loan plus interest) will be deducted from the death benefit at the time of claim. If the loan balance grows too large for the cash value to support it, the policy could terminate. Partial surrenders may affect the death benefit and could require additional premiums to keep the policy in force.


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Related Topics: Whole Life , Term Life , Cash Value