Life insurance, word by word

The contract between you and the insurance company.

Everything anyone tells you about how a policy behaves is either in this document or it is not true. If a sales page and the contract disagree, the contract wins. Ask for the actual policy form, not just the brochure.

The amount of coverage you bought.

Also called the death benefit at issue. On some permanent policies the amount actually paid is not the face amount. Cash value can be added to it, and an outstanding loan is subtracted from it.

See also: Death benefit, Policy loan

What the company pays when the insured person dies.

It goes to the named beneficiary and is generally free of federal income tax. It is reduced by any outstanding loan and unpaid interest. It can be paid as a lump sum or in installments, and the beneficiary usually chooses.

See also: Beneficiary, Policy loan

The money you pay in.

On term and whole life it is fixed. On universal life it is flexible within limits. That sounds like freedom, and it is the part that needs watching. Paying less than planned for several years is the most common reason a policy that looked fine on paper lapses later.

See also: Lapse, Universal life

The money that builds up inside a permanent policy.

It is not a separate savings account and it is not your money in the way a bank balance is. Charges come out of it every month. You can reach it by withdrawal or by loan. Whatever is left when you die does not usually go to your family on top of the death benefit, unless the policy was designed that way.

See also: Surrender value, Cost of insurance

What you would actually get if you canceled today.

Cash value minus the surrender charge, and minus any loan. In the early years of a permanent policy this number is much lower than the cash value, and for the first year or two it is often zero. This is the number to look at, not the cash value column.

See also: Surrender charge

The person or entity that controls the policy.

The owner can change the beneficiary, take loans, and cancel it. Usually the owner and the insured are the same person. When they are not, and when they should not be, is an estate planning question worth asking about.

The person whose life the policy is on.

Their age and health determine the price. They do not have to be the owner and do not have to be the one paying.

Who gets the money.

A primary beneficiary is first in line and a contingent beneficiary is next if the primary is gone. This designation beats your will: whatever the form says at the company is what happens, regardless of what the will says. Review it after every marriage, divorce, birth and death in the family.

See also: Probate

The policy is active and would pay a claim today.

Coverage does not exist until the policy is issued, the first premium is paid and it is in force. Never cancel an existing policy before the new one is in force.

See also: Replacement

Extra time to pay after a missed premium.

Usually 30 or 31 days. The policy stays in force during it. If the payment does not arrive by the end, the policy lapses, though most can be restarted for a while afterwards.

See also: Lapse, Reinstatement

The policy ends because its costs stopped being covered.

On universal life this can happen even when you never missed a payment, if the cash value ran out paying charges. A policy that lapses with a loan on it can also create a tax bill in the same year. This is the failure mode of the whole strategy and it is worth checking a statement once a year to be sure it is not heading there.

See also: Policy loan, Universal life

Restarting a policy that lapsed.

Usually possible for a few years afterwards. It typically requires paying the back premiums with interest and answering health questions again, and it can restart the contestability period. Cheaper than a new policy at an older age, and not free.

See also: Contestability period

No more premiums are due and the coverage continues.

Some policies are designed to reach this. Others reach a reduced paid-up state as a way of salvaging a policy that can no longer be funded, at a smaller death benefit.

The court process that settles an estate.

It is public, it costs money, and it can run for months. A life insurance death benefit paid to a named person skips it entirely, which is one of the real advantages of the product. Naming your estate as the beneficiary throws that advantage away.

See also: Beneficiary

The first two years, when the company can still check your application against a claim.

If you pass away in that window the company reviews what you answered on the application before paying, and that takes weeks rather than days. Honest answers are what make the claim fast. After two years it can generally only be contested for fraud.

See also: Graded death benefit

Coverage for a set number of years, then it ends.

The most death benefit per dollar by a wide margin, and it builds no cash value. Right when the need has an end date: a mortgage, the years until the children are grown, the years until retirement savings can stand on their own.

See also: Level term, Conversion privilege

A term policy whose premium does not change during the term.

A 20-year level term costs the same in year 19 as in year 1. After the level period ends the price usually jumps hard every year, which is by design and catches people who forget the date.

The right to swap a term policy for a permanent one without a new medical exam.

This is the most underrated feature in the product and it is why the fine print matters. Check the deadline, which is often an age or a number of years, and check which permanent products the company will let you convert into. Health that changed after you bought the term policy does not affect the conversion.

See also: Term life

Permanent coverage with a fixed premium and a guaranteed cash value.

The most predictable permanent product and the least flexible. Some whole life is participating, meaning it can pay dividends, which are not guaranteed.

See also: Dividend

Permanent coverage where you can vary what you pay in.

The cash value pays the policy costs each month. Flexibility cuts both ways: it lets a good year be used well, and it lets several thin years quietly hollow out a policy. Universal life needs an annual look at the statement in a way whole life does not.

See also: Lapse

Universal life where the interest credited follows a market index, with a floor underneath.

Your money is not in the market. The company credits interest based on how an index moved, subject to a participation rate, sometimes a cap, and a floor. The floor is on the credit, not on the cash value; charges still come out in a floor year.

See also: Participation rate, Floor, Index account charge

Universal life where the cash value is actually invested in market subaccounts.

Real market exposure, real losses possible, and generally the highest upside of the permanent products. It is a security, so it requires a prospectus and a securities license to sell. We are not securities licensed and do not offer it.

Universal life priced for the death benefit, with little cash value.

Close to permanent term. Often the cheapest way to guarantee coverage to a late age. If the goal is a death benefit and not a savings vehicle, this often beats an indexed policy on cost. Ask about it rather than being sold past it.

A small whole life policy meant to cover a funeral and the bills around it.

Usually $5,000 to $25,000, a fixed premium for life, and either a few health questions or none. Simple by design. If you live a long time you can pay in more than it pays out, which is the trade and is worth knowing before signing.

See also: Simplified issue, Guaranteed issue

Approval based on a few health questions, with no medical exam.

Faster and usually cheaper than guaranteed issue, and it pays the full benefit from day one. Worth trying before accepting a guaranteed issue policy, because the price gap is often large.

No health questions at all, and nobody is turned down.

The full benefit is almost never payable immediately. These policies carry a graded death benefit for roughly the first two years, and the premium is higher than a policy that asks a few questions. It is the right answer for some people and the expensive answer for many who were never asked the questions.

See also: Graded death benefit

A waiting period before the full amount is payable.

Typically the first two years. If death is from natural causes in that window the company returns about 110% of the premiums paid, rather than the face amount. Accidental death is usually covered in full from day one. This is the single most important thing to understand about guaranteed issue.

See also: Guaranteed issue

Coverage through an employer or an association.

Usually free or nearly free and usually a multiple of salary. It generally ends when the job does, which is often exactly when it is needed. Useful as a layer, risky as a foundation.

A published measure of how a group of stocks moved.

The S&P 500, the Nikkei 225 and similar measures. An indexed policy watches one or several of them and credits interest based on the movement. You do not own the shares and you do not receive the dividends those shares pay.

See also: Dividend, Blend

Several indices combined in fixed proportions.

Used because different markets rarely have their worst year at the same time. A blend smooths the ride and usually lowers the peak; it is a trade, not a free improvement.

The rule for turning index movement into interest.

Annual point-to-point compares one date a year to the same date the next year, which is the most common and the easiest to check. Monthly average and monthly sum methods behave very differently in a choppy year. The method matters as much as the participation rate, and it is rarely the number anyone leads with.

One batch of money with its own start date and its own crediting period.

Money going in at different times forms different segments, each measured from its own start date. It is why the credit on a statement rarely matches one clean index figure.

The share of the index move that gets credited.

Above 100% credits more than the index moved. It is set by the company and can be changed on renewal, within limits stated in the contract. Ask what the guaranteed minimum participation rate is, not just the current one.

A ceiling on the credit, no matter how far the index rose.

A capped account with a 9% cap credits 9% in a year the index rose 30%. Uncapped accounts have no ceiling and usually pay for it elsewhere, through a lower participation rate or an account charge. Neither is better; they are different shapes.

See also: Index account charge

The least the account can be credited in a bad year.

Often 0%, sometimes slightly above. It is a floor on the interest credited, not on the cash value: policy charges still come out, so cash value can fall in a floor year. A floor also catches a small rise, because a tiny gain can land below the floor once participation is applied.

See also: Index account charge

A yearly charge for being in an uncapped account.

Also called a spread or an asset charge. It comes off the credit. This is why a floor year does not net the floor: a 0.75% floor less a 0.72% charge credits 0.03%, which is not the same as the money growing.

The non-indexed bucket inside the same policy.

Credits a declared interest rate rather than following an index. Most policies let you split money between fixed and indexed accounts and move it at each segment date.

The assumed yearly credit used in a projection.

Regulation limits how high this can be, because carriers were once illustrating rates their accounts could not support. The limit reflects a judgment about what an index account can reasonably be assumed to earn. This is the rate to plan on.

See also: Illustration

The monthly charge for the actual coverage.

Usually shortened to COI. It rises every year as you age, which is invisible while the cash value is growing and very visible when it is not. On an illustration it is a column, and it is worth asking to see it.

A percentage taken off each payment before it reaches the cash value.

So a dollar paid in is not a dollar credited. Loads are usually heaviest in the early years.

A flat monthly administrative charge.

Small in dollars and meaningful on a small policy, because it does not shrink with the face amount.

A penalty for cancelling or taking too much out early.

Typically runs ten to fifteen years, shrinking each year to zero. It is a charge from the insurance company and is completely separate from anything the IRS does. Ask for the schedule year by year before deciding how much to put in.

See also: Surrender value

The extra cost of an optional feature.

Most riders are not free, and some that sound free are paid for through a reduced benefit elsewhere. Ask what each one costs per month.

See also: Rider

Taking money out of the cash value and not paying it back.

Also called a partial surrender. It permanently reduces the cash value and usually the death benefit. Up to your basis it is generally free of income tax; above that it is taxed.

See also: Basis

The total premium you have paid in.

The dividing line for tax on withdrawals. In a non-MEC policy, money out is treated as your premium coming back first and gain second, which is the friendly order.

See also: Modified endowment contract

Borrowing against your own cash value, with the policy as collateral.

It is not a distribution, so it is not taxed while the policy stays in force, and there is no early-withdrawal penalty at any age. It is still a loan. Interest is charged, unpaid interest is added to the balance, and the loan reduces the death benefit until repaid. If the loan plus interest ever exceeds the cash value the policy can lapse, and a lapse with a loan can create a tax bill.

See also: Lapse, Wash loan

A loan where the interest charged matches the interest credited.

Sometimes called a zero-cost loan. The net cost is roughly nothing while it holds. Whether it holds depends on contract terms and on what the company is crediting, so it is worth reading rather than assuming.

See also: Policy loan

A loan where the borrowed money keeps earning index credits.

The upside is that borrowed money can still be credited. The risk is the mirror image: if the credit comes in below the loan interest rate, the gap works against you, and it compounds. Higher ceiling, real floor risk.

See also: Policy loan

What the company charges on a policy loan.

Either a fixed rate stated in the contract or a variable one. Ask which, and ask what the maximum is. Unpaid interest joins the loan balance and compounds, which is how a small loan becomes the reason a policy lapses twenty years later.

The law that decides whether a contract counts as life insurance for tax purposes.

It sets how much premium can go in relative to the death benefit. Pass it and the policy gets life insurance tax treatment. This is the reason a policy cannot simply be stuffed with money.

A policy funded so fast it loses the friendly tax treatment on withdrawals.

Shortened to MEC. It keeps its death benefit, still free of income tax. But loans and withdrawals are then taxed on the gain first, and can carry a 10% penalty before age 59 and a half. The change is permanent and cannot be undone. A well-designed policy is built to stay under the line on purpose.

See also: Basis

A rule that wipes out the built-up gain on some assets at death.

Applies to things like a taxable brokerage account or real estate, not to a life insurance policy, which does not need it. Worth knowing because it is the honest counter-argument to some of what gets said about life insurance and taxes, and any comparison that ignores it is not a fair comparison.

Whether the death benefit counts toward your taxable estate.

It is free of income tax either way. If you own the policy, the death benefit is generally counted in your estate for estate tax. Larger estates often place the policy in an irrevocable trust so it is not. This is a question for an estate attorney, not an insurance agent.

A rule that lets you move cash value from one policy to another without triggering a tax bill.

The tax is deferred, not forgiven, and the exchange is not automatically a good idea. A new policy starts a new surrender charge schedule and a new contestability period. It requires a replacement notice and a written comparison.

See also: Replacement

How the company decides whether to cover you and at what price.

It looks at age, health, family history, prescriptions, driving record, occupation and hobbies. The output is a health class, and the health class is what actually sets the price.

See also: Health class

The rating band your price comes from.

Names vary, roughly preferred plus, preferred, standard plus, standard, then substandard bands. The gap between the top and the middle is large, and quoted prices almost always show the top. Ask which class a quote assumes.

See also: Table rating

An extra charge for a health condition.

Expressed as a table number or a letter, each step adding a percentage to the standard price. Some conditions improve over time, and some companies will review a table rating after a few good years if asked.

A short health check done at your home or office.

Height, weight, blood pressure, and usually blood and urine samples. Many policies now skip it entirely using prescription and data checks.

Your doctor sends the company your records.

Requested when the application or exam raises a question. It is the single most common reason an application takes weeks rather than days.

The window when the company can still check your application against a claim.

Usually the first two years. If an answer was wrong about something that mattered to the decision to cover you, they can reduce or deny the claim. After the window they generally cannot, except for fraud where state law allows. This is why every question gets answered completely, including the small ones.

Death by suicide is not covered during the first two policy years.

One year in a few states. The company generally returns the premiums paid instead. It is written into the contract and no agent can waive it.

An answer that was wrong about something that would have changed the decision.

This is the thing contestability is looking for. Forgetting a medication is not the same as omitting a diagnosis, but the safe move is to disclose everything and let the company decide.

A window after delivery when you can return the policy for a full refund.

Also called the right to examine. Ten to thirty days depending on your state and on whether the policy replaces another. No reason is required and nobody has to approve it. Read the policy during it.

An optional add-on to the contract.

Some are free, most cost something. The value of a rider is in its trigger language, which is what decides whether it ever pays.

Access to part of the death benefit while alive, under certain conditions.

Often called living benefits. Usually triggered by a terminal, chronic or critical illness. The details of what counts vary a lot between companies, and the amount taken early reduces what the family receives. Read the trigger definitions, not the brochure.

The company pays your premium if you become disabled.

Definitions of disability differ sharply. "Own occupation" is much stronger than "any occupation" and usually costs more.

Small coverage on your children attached to your policy.

Inexpensive, covers all current and future children under one charge, and is often convertible to a policy of their own later regardless of their health at that time. It builds no cash value.

Uses the death benefit to help pay for care.

Cheaper than standalone long-term care insurance and generally less comprehensive. Check whether it is reimbursement or indemnity, what triggers it, and how much per month it actually releases.

Taking part of the death benefit early, while you are still alive.

Triggered by a qualifying illness. The money is not extra. It comes out of what your family would have received, usually with an interest adjustment, so the death benefit shrinks by more than you took. Ask for the number in writing before you accelerate.

See also: Rider, Terminal illness rider

Lets you access most of the death benefit when a doctor certifies a limited life expectancy.

Usually twelve or twenty-four months, and the contract says which. Often included at no extra premium, which is why most people who have it do not know they have it. What you take is subtracted from what your family gets.

See also: Accelerated death benefit

Access to the death benefit when you cannot do two of six everyday activities on your own.

The six are bathing, dressing, eating, transferring in and out of a bed or chair, using the bathroom, and continence. Severe memory conditions can also qualify. A licensed professional has to certify it, usually as expected to last ninety days or more. This is the rider most likely to be used and least likely to be known about.

See also: Accelerated death benefit, Long term care rider

A lump sum on diagnosis of a listed serious condition.

Heart attack, stroke, cancer, kidney failure and major organ transplant are typical. The contract lists exactly which conditions count and how severe they must be, and that list is shorter than most people assume. Read it before you rely on it.

See also: Accelerated death benefit

Uses part of the death benefit to pay for ongoing care, at home or in a facility.

Not the same as a standalone long term care policy and it does not cover as much. The appeal is that if the care is never needed the money still goes to your family, which is the objection people have to traditional long term care cover. Availability and terms vary by state.

See also: Chronic illness rider, Accelerated death benefit

The insurance company that issues the policy.

The carrier is who stands behind every guarantee. An agent or agency is not the carrier and does not guarantee anything.

See also: Claims-paying ability

Whether the company can actually pay what it promised.

Every guarantee in a policy depends on this and on nothing else. Not FDIC insured, not bank guaranteed, not backed by any government agency.

See also: Guaranty association

A firm that grades insurance companies on financial strength.

Ratings run on letter scales that differ between agencies, so a grade means nothing without the agency, the scale and the date. A rating measures the company, not the policy, and it can change.

A state safety net if an insurance company fails.

Every state has one, coverage limits differ by state, and they are typically well below large policy amounts. It exists, and it is not a reason to skip looking at the carrier.

An insurance company owned by its policyholders rather than shareholders.

Policyholders may receive dividends when the company does well. Stock companies answer to shareholders instead. Both issue sound policies.

See also: Dividend

A share of the company’s good year returned to policyholders.

Only on participating policies, usually whole life. Dividends are never guaranteed. An illustration that shows decades of them is showing an assumption, not a promise. Note this is a different thing entirely from stock dividends inside an index.

The licensed person who sells the policy.

Also called an agent. Licensed state by state, with a National Producer Number you can look up. Ask for it.

See also: Independent agent

An agent who can place business with several companies.

A captive agent represents one. Independent is usually better for the buyer, and it is not a guarantee of neutrality. Commissions differ between products. The honest move is to ask how the agent is paid on what they are recommending.

See also: Commission

How the agent is paid.

Paid by the insurance company out of the premium, not billed to you on top. It is higher on permanent policies than on term, and higher in the first year than later. You are allowed to ask, and the answer tells you something.

The company document projecting what a policy might do.

Built on your real age, health class and funding, with guaranteed and non-guaranteed columns side by side. The guaranteed column is the promise; the other is an assumption. This is the document to read before signing anything, and no website is a substitute for it.

See also: Illustrated rate

Ending or changing one policy to buy another.

State rules require a replacement notice and a written comparison. Replacing is sometimes right and sometimes not, and the comparison is what shows which. Never cancel the old policy before the new one is in force.

See also: 1035 exchange, In force

The specific version of a contract, filed with and approved by the state.

Identified by a form number on the policy. It is why a product can differ between states and why a feature described generally may not exist in yours.