5 Essential Life Insurance Terms to Know

When you begin the journey of getting a life insurance policy, the industry jargon can seem overwhelming. However, mastering just a few key terms can help empower you to navigate this complex landscape easily. In this article, we’ll break down some of the most crucial life insurance terms, equipping you with the knowledge to confidently help select the right policy for your needs.

Premium

The premium is the amount you’ll pay monthly or annually for life insurance coverage. Your premiums will differ depending on the type of policy. For example, a term life insurance policy typically has more cost-effective premiums than whole life insurance since the latter can accrue cash value. Understanding the difference between term vs. whole life insurance can help you choose a policy with premiums that fit your budget.

Underwriting

When you apply for a life insurance policy, the company will need to assess your health and lifestyle to determine how risky you are to insure. The process of determining this risk is referred to as underwriting, which is completed by an insurance professional called an underwriter.

Your age, health, lifestyle, and other factors help determine whether you’re approved and how much you’ll pay for a policy. Together, these components are used to assign you a risk classification. Less risky individuals, like those who are young, healthy, and not participating in extreme hobbies like skydiving, often receive more favorable rates.

Beneficiary

A beneficiary is one or more people who will receive the death benefit if you pass away with an active life insurance policy. All types of life insurance will request you to assign a beneficiary.

You can choose a sole beneficiary to receive the entire payout or allocate certain percentages to multiple beneficiaries.

For example, if you have a partner and two children, you could allocate 50% to your partner and 25% to each of your children. If you don’t name a beneficiary, the death benefit will likely become part of your estate instead of the tax-free benefit going directly to your loved ones.

Death benefit

A policy’s death benefit is the amount paid to your loved ones if you pass away while the policy is active. For example, a 10-year $100,000 term life insurance policy would pay out a death benefit of $100,000 to the assigned beneficiaries if you pass away during the 10-year term, assuming premiums are paid.

Cash value

Cash value is a term specific to permanent life insurance policies, including whole and universal life. When you pay premiums for permanent life insurance, some of the premium goes toward the policy’s death benefit, while another portion goes to building the policy’s cash value.

This cash value is kept in a separate account that functions similarly to some savings and investment accounts and is accessible during your lifetime. You can use the funds to pay premiums, make a withdrawal, or take out a loan. The way cash value is handled depends on the insurer and type of policy, so it’s important to clarify how cash value works for the specific policy and company you choose.

The Bottom Line

Understanding key life insurance terms can help you make a more informed decision about the best policy for you. A life insurance professional can also help you decode more complex terms as you go through the process.

Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.