Life insurance is one of the most complex lines of insurance and one of the most important types of insurance you'll ever buy. Unfortunately many people rely on an agent or financial advisor to tell them what they need to know. This can quickly lead to someone else making decisions about levels of coverage and life insurance purchases.
Although consulting with a life insurance professional is advisable, you should be well-informed about this type of policy. If you gain a working knowledge of life insurance, you'll know exactly what questions to ask, determine what your needs are, and make the right changes when needed.
Some of the most basic life insurance terms are defined in Important Life Insurance Terms Defined: Part 1, but there are so many different life insurance components that it's impossible to learn everything you need to know from 1,000 words. However, with a few thousand, you can at least gain a great foundation to build upon and will know what some of the most commonly seen terms mean. Here are some more basic life insurance terms defined.
Beneficiary: When someone takes out a life insurance policy, the person is asked to designate someone to be the receiver of the insurance proceeds upon their death. Typically an insured will designate a primary beneficiary and also a contingent beneficiary, which allows for provisions if the primary beneficiary is no longer alive at the time of the insured’s death. If this were the case, one or more of the contingent beneficiaries would receive the funds. Additionally, the insured can designate the percentage that each beneficiary is to receive. For example, if someone names two primary beneficiaries, they can dictate what percentage of the funds each party receives, so an insured could state that one beneficiary receives 50% and the other receives 50%. The same can be done for contingent beneficiaries as well, and there are literally unlimited options when it comes to the percentages allotted for each beneficiary and to whom and how much is paid upon the insured’s death.
Fixed Benefit: This is a benefit specifically defined in a life insurance policy that will always stay the same and will never change.
Annuity: An annuity is a financial product that shares many of the same aspects life insurance does and some people choose to buy annuities as form of life insurance protection for their spouses. This product accepts money from the buyer and upon an agreed annuitization, payments are then made to the person at a pre-determined date in the future. Typically, annuities are purchased so that a person has a regular ‘income’ once they’re retired, thus, many people purchase annuities in order to ensure that a family member or loved one will also have more financial security. Payments can be fixed or variable, and payments will continue to be made as long as the purchaser or the purchaser’s spouse is alive.
Free Look Period: This is a period of time during which the insured legally maintains the right to look over a new policy and if they’re unsatisfied for any reason, they can ‘take it back’ to the insurer to receive a full refund of any premium paid. This period of time depends on each state but is usually anywhere between 10 and 30 days, although 10 days is the average allowed.
Flat Extra: This refers to a dollar amount charged in premium for every $1,000 in insurance purchased to provide coverage for any kind of extra hazards or risks that a policy holder presents. Also referred to as ‘extra premium,’ an example would be if someone was an avid rock climber, sky diver, or pilot.
Guaranteed Issue: This is a provision which grants a person a certain amount or type of insurance to be purchased without the insured having to provide proof of medical insurability.
Guaranteed Renewable: This is a specific provision to an insurance policy guaranteeing that an insurance policy will remain in force if the premium is always paid on time. In most scenarios, insurance companies can only cancel a guaranteed renewable policy if the premium payments are not made.
Incidents of Ownership: This refers to the different rights defined by the insurance policy, and includes rights such as permission to cash in a policy, change beneficiaries, or take out a loan if the policy has any cash value.
Irrevocable Trust: Generally this is purchased when life insurance is bought to provide protection to an estate, and it canít be amended or canceled by the person who sets it up, essentially making it a permanent option.
Revocable Beneficiary: This is a type of insurance beneficiary whose designated status can be changed without their consent.
Living Benefit: Also commonly referred to as an ìaccelerated death benefit,î this benefit pays a part of a policyís death benefit before an insured passes away if the insured is diagnosed with a terminal illness. The requirements of this benefit are different with each insurer.
Occupational Hazards: These hazards are defined in a policy based upon what hazards an insured faces due to their job. These hazards could increase the likelihood of being injured, becoming ill, or even causing death. Occupational hazards can influence whether an insurance applicant is ìinsurable.î For instance, a race car driver would have a harder time getting life insurance and will pay a larger premium because they face such a large risk of death or serious injury due to their job. The insurance company is more likely to pay out sooner than regularly expected and/or before the applicant has paid a significant amount of premium, meaning the insurer is facing more of a financial loss. Obviously, these hazards can greatly affect insurability and the cost of life insurance.
Other Types of Life Insurance Policies
To find out more about the most common life insurance terms, refer to Important Life Insurance Terms Defined: Part 1.
Flexible Premium Policy: This permanent life insurance enables to policy owner to modify the payments amounts and schedule.
Flexible Premium Variable Life Insurance: In addition to allowing the policy owner to modify the payment amount and timing, this variation of a flexible premium policy is variable and depends solely on the policy investment performance.
Decreasing Term Life Insurance: This variation of term life insurance has a death benefit which decreases every year or on the anniversary of the policy. Typically, this kind of insurance is bought to cover things such as paying off a loan.
Guaranteed Term Life Insurance: This type of term life insurance can be renewed, and will stay in force if the predetermined policy premium payments are always made on time.
Level Term Insurance: A type of term life insurance that has a face value that will always stay the same for the duration of the defined time period. Simply, this means that factors such as investments are not playing a part in the value of the policy or the amount the policy will pay out, so the coverage amount of your policy isn't going to change..
Life Insurance Trust: This is a life insurance policy where a trust company is the designated beneficiary, and then the policyís proceeds are paid according to the terms of the trust agreement.
Second to Die Life Insurance: This is a life insurance policy that insures two people, usually a husband and wife. Death benefits are paid to the beneficiary after both people on the policy have died.
Single Premium Life Insurance: A life insurance policy where only one premium is required. This kind of policy guarantees to remain paid-up during the policy holderís lifetime.
Yearly Renewable Term Policy: Also known as a YRT, this type of term life insurance provides death benefits and premiums that are increased every year as the policy older ages. Sometimes this is referred to as a annually renewable term policy. Yearly Renewable Term policies differ from regular term policies because they wonít automatically cancel out once the policy owner outlives the insurance policyís term.
Of course, the majority of these terms are much more complex, but a having a basic understanding of them will help you accurately determine the best type of life insurance for you. Being familiar with these terms can greatly affect your buying decisions, and can be beneficial for you and your loved ones,
-Desiree Baughman, InsuranceQuotes.org
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