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Glossary of terms pertaining to life insurance

Accelerated death benefit – a rider added to many life insurance policies where a cash advance against a future death benefit may be made to the insured – usually in the case of a terminal illness where the insured has less than 1 year to live

Beneficiary – the person(s) or entity entitled to the death benefit of a life insurance policy – death benefits may be split in any proportion desired

Buyout insurance – a life insurance configuration between partners or co-shareholders of an organization designed to provide the funding for a buyout of the business ownership stake of a deceased partner in the event of death

Cash value – the cash account associated with a permanent life insurance policy

Conversion option (convertability) – a right of a term policyholder to exchange their term policy for a permanent plan offered by the same company w/o any evidence of insurability (no examination is required)

Cross purchase plan – a life insurance configuration where several shareholders, or owners of a company, purchase life insurance policies on each other to buyout the others’ interest in the company if death should occur

Death benefit – the payout of a life insurance policy to the beneficiary or beneficiaries’ upon death of an insured

Dividend – a company’s divisible surplus of profits disbursed to policyholders

Insured – the person or person’s life that is covered on a life insurance policy

Face amount – the death benefit available on a life insurance policy

Future purchase option – a rider that allows for additional insurance to be purchased at future dates not subject to underwriting – typically seen on permanent policies, especially those purchased for children

Key man (person) insurance – an insurance policy on the life of a key employee – the design is two-fold; protects the company against the death of a person critical to the company’s operations and, when permanent insurance is used, can provide non-qualified future cash values for the key employee to incentivize them to remain with the company

Laddering – a premium saving strategy utilizing the purchase of several policies with varying lengths of coverage-generally used in pension cases where different amounts of coverage is desired as one ages

Owner – the person, persons or entity that is in control of a life insurance policy – also entitled to all decisions regarding the beneficiary and cash values

Payor – the person or entity responsible for paying premiums on a life insurance policy

Permanent life insurance – a life insurance policy designed to remain in-force for life – typically to age 100, however, new configurations go as far as age 120

Per stirpes – a beneficiary arrangement where a deceased beneficiaries’ portion of a death benefit is distributed to their beneficiaries in equal parts

Premium – the amount of money or consideration, required to keep a policy in-force – usually paid monthly, quarterly, semi-annually or annually

Risk/Health Class – Risk class, in insurance underwriting, is a grouping of insureds with a similar level of risk. Typical underwriting classifications are preferred, standard and substandard, smoking and nonsmoking, male and female

Second to die insurance (survivorship insurance) – a life insurance policy with two insureds – most times on a husband and wife with the death benefit payable upon the 2nd death

Section 1035 Exchange – This refers to a part of the Internal Revenue Code that allows owners to replace a life insurance or annuity policy without creating a taxable event. Cash values move from one policy to another w/o a taxable event

Surrender value – the amount of cash available if a policy is surrendered or cancelled – sometimes this is less than the cash value, depending on the age of the policy

Term – the length of a guaranteed premium and death benefit for a term life insurance policy; most popular are 10,15,20 or 30 year periods of coverage….also referred to as “renting” coverage

Term life insurance – an economical life insurance contract with a defined, guaranteed premium and premium pay period

Underwriting – the process of qualifying for a life insurance policy; the medical underwriting process can include these items depending on age and amount of coverage applied for: paramedical exam for vitals, medical history, blood and urine samples, personal history phone interview, application, retrieval of medical records, motor vehicle report & credit check

Universal life insurancea permanent life insurance contract where both premiums and death benefits are flexible. Cash values are determined by premiums and short-term interest rates. Generally, premiums should be adjusted annually depending on how the interest rate credited to the cash account changes over time. These require management. For more info on these, please see this page

Waiver of Premium – A rider in some insurance policies which enables an insurance company to waive the collection of premiums while keeping the policy in force if the policyholder becomes unable to work because of an accident or injury. The waiver of premium for disability remains in effect as long as the ensured is disabled.

Whole life insurance – A fife insurance policy which might be kept in force for a person’s whole life and which pays a benefit upon the person’s death, whenever that might be. For more on this go here

Variable universal life insurance – a permanent life insurance policy where cash values are driven by sub – account funds selected by the owner – these are the riskiest of policies – for more detailed info on this, see this page

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