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Understand how life insurance works

14 Important Life Insurance Terms – Explained!

life insurance

A life insurance policy can help protect your family and loved ones from the financial impact of your death. But how can you be sure to choose the right policy? To start, you can research your insurance options.

Here are 14 important life insurance terms that you should know to help you make the right choice.

Term 1: Life Insurance

Life insurance is an agreement that you make with an insurance company. It states that the company will pay a specific amount of money to a specific person – your beneficiary – in the event of your death. As your portion of the agreement, you pay set amounts of money over time to the company providing your insurance. These payments are called premiums.

Term 2: Agent/Producer*

An agent/producer* works with you and an insurance company to help find a policy that works for you both. Some agents/producers* work directly for insurance companies while others work independently and provide options from multiple companies at one time. They’re licensed by each state and should be knowledgeable on all things life insurance. Agents/Producers* can answer questions and provide you with research to help you make decisions about your policy and coverage. You do not have to work with an agent/producer* to purchase life insurance. However, even if you sign up online, an agent/producer* may reach out to offer support through the process.

Term 3: Expenses

“Expenses” is a term you may see when you get a breakdown of your life insurance costs. So, what does it mean? Expenses, sometimes called fees, are usually made up of your share of the company’s operating costs and fees. These costs are generally all lumped together and can include:

  • Medical examinations and inspection reports
  • Underwriting fees
  • Commissions
  • Advertising costs
  • Agency expenses
  • Premium taxes

 For example, if it costs your life insurance company a fee to underwrite you, you may be responsible for covering some of that cost. But instead of saying “underwriting fee,” it may just say “expenses.”

Term 4: Policy

A policy is the legal document stating the details of the life insurance contract. It’s issued to the policy owner by the insurance company. Policies can be short term or last your entire life.

Term 5: Rider

A rider is added to your insurance policy to cover more specific circumstances.

For example, there are “child riders.” Instead of purchasing separate life insurance for your child, you can add a child rider to your current life insurance policy. This rider can provide extra coverage specifically for your child. Your policy premium will go up, but your child will be covered by your life insurance policy.1

Term 6: Beneficiary

A beneficiary is who will receive your life insurance policy payout in the event of your death. Anyone can be named as a beneficiary. You can also choose to name a charity, a trust or your estate to receive the policy amount.

You’ll be asked to name a beneficiary when you purchase your policy. Choosing a life insurance beneficiary may seem simple, but it’s important to take the time to think about who this benefit will go to in the event of your death. Often, beneficiaries are family members or loved ones.

Term 7: Premium

A premium is the payment that the life insurance policy owner agrees to make in exchange for coverage. The premium can be paid all at once or over an agreed upon timeframe. The most common payment method is on a monthly basis.

Term 8: Underwriter

The underwriter is the person who decides if you can be insured and at what cost. Underwriters typically work for financial and insurance companies. The underwriter will look at things like:

  • Your background check
  • Your health history
  • If you’re a smoker/non-smoker
  • Your family’s health history
  • Your hobbies – especially if you have any dangerous ones!

You may never meet or hear from an underwriter directly. But you will need to be aware of how they review your policy to understand the effects on your policy coverage or premium.

Term 9: Cash Value

Some life insurance policies build what’s called cash value over the life of the policy. Cash value is the amount of cash available to you from your policy. If you have a policy that builds cash value, you can use it before the event of your death. In some cases, this amount can be removed from your policy. It’s important to know that if you use the cash value your policy builds, your death benefit – the amount you receive in the event of your death – will be reduced.

Term 10: Tax-deferred

Tax-deferred means that the taxes on an item are paid at a future date, instead of when the item is initially purchased.

For example: The cash value of your life insurance plan can be tax-deferred, meaning you will pay taxes on the cash you would get if you used the cash value from your life insurance policy. Keep this in mind if you think your tax rate will be lower later in life (after you are retired) than it is currently.

Term 11: Term Life Insurance

Term life insurance provides affordable coverage for a specific period of time. The period is chosen by the policy holder. Terms typically last between 5 and 30 years.

Term life policies can be a good option if you only need coverage for a specific period of time. Term life insurance works like this: If you have a 30-year mortgage that your loved ones could not afford without your income, a 30-year term life policy might make sense.

Other uses could be to help cover items that only last for a period of time:

  • Children’s education or care costs
  • Larger home costs
  • Higher earning years

Term 12: Permanent Life Insurance

Permanent life insurance provides protection that lasts a lifetime. It may build cash value that can be used when you’re living. Remember that if you use the cash value, your payout amount decreases.

Permanent life insurance can be used to help cover long-term needs, including:

  • Paying for final expenses
  • Provide an ongoing income for your family
  • Supplement retirement income
  • Fund an estate or business continuation plan

Whole life and Universal life plans are types of permanent life insurance policies.

Term 13: Whole Life Policies

Whole life insurance offers premiums that are guaranteed not to increase. It includes a benefit your beneficiaries will receive in the event of your death. There’s also the potential for the cash value to grow on a tax-deferred basis. You can access that cash value for any needs that may come up for you or your family.

Term 14: Universal Life Policies

Universal life insurance are permanent policies with flexible premiums and benefits. It allows you to adjust premium-payment amounts and frequency. You may also have the ability to increase or decrease the death benefit amount. Universal life insurance also has the potential to build cash value on a tax-deferred basis.

Universal life insurance can be expensive and isn’t right for everyone, so make sure you consult with an agent/producer before purchasing a policy.

Now that you have a better understanding of what some of the important terms mean, you can feel confident when you’re exploring your life insurance options!

* In WA/OR, agent is producer. 

Consult with a professional tax and/or legal advisor before taking any action that may have tax or legal consequences. 

1 Policy Genius (n.d.). Web page: What Is a Life Insurance Rider? Retrieved June 20, 2018, from  

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