Simple Answers to Life Insurance Terms and Definitions
Life Insurance FAQ
Life Insurance Glossary
Life Insurance Glossary: 90+ Terms to Know
This life insurance glossary compiles 93 of the most common terms you are likely to hear and will definitely need to know when you are looking to buy life cover. Our glossary of the most common life insurance and premium financing terms and conditions will help guide you, so you can make an informed choice of which policy is right for you and how best to finance the cost of buying it.
An individual of an insurance company who analyses data and statistics to understand insurance risks and calculate premiums.
The calculation is used by a life insurance company for an applicant’s age.
An individual or company applying for a life insurance policy. The applicant may be different from the proposed insured or the policy owner.
The forms are completed by the individual requesting cover from a life insurer. These forms request information that helps the life insurance company assess the risk of the individual applying for insurance. The statements made in the application guide an underwriter in deciding how much premium they will charge a prospective life insured.
The transfer of ownership rights of a life insurance policy from one person to another. For example, if a life insured is using finance to buy their policy, an assignment of their policy will be made until the premium financing loan has been made.
Attending Physician's Statement (APS)
Information provided by a proposed life insured's doctor or physician covering the medical history and medical examination results. The information provided is used to determine the risk underwriting classification for the proposed insured.
Backdating can be used to make the age of the insured at policy issue lower than it actually is in order to receive a lower premium. Many insurance companies allow backdating of policies up to six months.
A person who will benefit from receiving the proceeds of an insurance policy upon the death of the life insured. There can be more than one beneficiary of a life policy and the list of beneficiaries can include an individual, a company, a trust or a charity.
A primary beneficiary is a person or organisation that will receive the first payment from the insurance company
A contingent beneficiary is a person or organisation that the insurer will pay if the primary beneficiary is deceased or no longer in existence if a company, trust or charity.
Business Life Insurance
Life insurance can be bought by a business to insure its key individuals. For example, life insurance is owned by a business on the life of a key employee and insurance is owned by a business partner on the life of another business partner.
Buy Sell Agreement
A buy sell agreement for the transfer of the business owner to the remaining owners at the death or retirement of an owner is typically funded by a life insurance policy. Each individual owner of a business has a life insurance policy, which can be used as part of this type of planning.
An insurance carrier is more usually known as an insurance company.
Cash Surrender Value
The cash amount is payable by the insurer to the policy owner if they cash in their life insurance policy. The cash value amount includes deductions for any remaining surrender charges on the policy and any outstanding loans and interest payments due to the insurance company.
The cash value of some life insurance policies, which typically grows over time earning a rate of interest or in line with stock market returns. The policyholder can cash in the policy and receive the cash surrender value.
There is a difference between a policy’s cash surrender value and its guaranteed cash surrender value. The guaranteed cash value of a life policy can usually be borrowed against by its owner from the insurance company, a third party life premium financing company or a bank.
Change of Beneficiary
A life insurance policy owner can change the beneficiary of the policy unless an irrevocable beneficiary has been designated.
Change of Beneficiary Form
An insurance company form that the policy owner must complete and sign in order to change the beneficiary of a policy.
A claim made to an insurance company that payment of the life policy benefit must be paid under the terms and conditions of the policy.
A provision added to a life insurance contract, for example, a suicide clause. For example, most insurers will have a clause in their contract stating that they will not payout in the event of a suicide of the life insured within the first two years of taking out a policy.
The collateral assignment document is a pledge document signed, typically, by the life insured, of the life policy as security. For example, a collateral assignment document to a lender for the repayment of a premium finance loan taken out to purchase the policy.
A payment or fee that is paid to a life insurance broker or financial adviser for making the sale of a life policy.
The contestability period is the time during which an insurance company can refuse a claim if a material misrepresentation has been made in the application. This period usually covers the first two years a life insurance policy is in force. After the two-year period, the policy becomes incontestable and an insurer must pay out any claim.
A contingent beneficiary receives the policy proceeds if the primary beneficiary dies before the life insurance proceeds are payable. The contingent beneficiary is also known as the secondary beneficiary.
Credit Rating Agency
A credit rating agency assesses the financial strength of a life insurance company. Credit agencies include Standard & Poor's, Moody's, Fitch and A.M. Best. Ratings are awarded to life insurers according to the risk they are taking and the liabilities they hold. It is the ability to meet these long term obligations that is important for policyholders and financial advisers who recommend life insurance products. See also Financial Strength Rating.
The death benefit is how much the life insurance policy will payout to the beneficiary(s) of the policy upon the life insured’s death. The death benefit will usually be paid in one lump sum. The death benefit is also known as the face value.
Decreasing Term Life Insurance
A type of term life insurance policy with a death benefit that decreases every year. For example, a decreasing term life insurance policy can be used to cover a loan balance that decreases over time.
The effective date is the date the life policy is considered to be in force.
Equity Index Universal Life Insurance Policy
Equity index universal life insurance policy is a form of permanent life insurance, which is also known as indexed universal life insurance, or jumbo insurance.
Estate planning prepares an individual’s financial affairs for when they die. One of the tasks in estate planning is to deal with the immediate liquidity needs of the family and pay any taxes that become due upon the death of the individual. Both these needs are often funded with a payout from life insurance.
Evidence of Insurability
A statement or proof of an individual’s health and financial affairs. Information submitted may include medical records, bank statements and property records. This evidence is submitted to the insurer as part of its assessment in underwriting the individual applying for life cover.
Specific conditions that are listed in an insurance policy for which the policy will not provide life cover.
The date on which an insurance policy stops providing life cover to the insured individual.
An amount charged in addition to the regular premium to cover any extra risk like hazardous activities, which could include sports car racing or a private flying hobby.
The amount of life cover provided by a life insurance policy. It can also be referred to as a coverage amount.
Financial Strength Rating
A financial strength rating is a forward-looking opinion from a credit rating agency about the creditworthiness of a life insurer with respect to its current and future financial obligations. Credit rating agencies like Standard & Poor’s, Fitch Ratings, A.M. Best and Moody’s are often used to assess and rate an insurer’s financial strength. These ratings are also used by professional wealth managers and insurance brokers when assessing which policy to recommend. Banks and premium finance companies also use the ratings to assess the creditworthiness of the life insurance policy as collateral for a loan, which is known as premium finance.
However, it is important that investors in life insurance policies do not use this financial strength rating alone as an assessment or recommendation to invest in a particular product. It is also not an indication of the future performance of insurance policies.
Financial strength ratings typically range from a ‘AAA’ rating to ‘CCC’. For example, ‘AAA’ is the highest possible rating and means a life insurer’s capacity to meet its debt obligations is very high. It also has an extremely low solvency risk from changes in business, financial, or economic conditions.
A grace period is a time between a life insurance policy’s premium's due date and the date the policy will lapse if the premium remains unpaid. Most insurers offer a 30 day grace period.
Group Life Insurance
A group life insurance policy may be offered to employees by a company as part of a benefits package. The cost of the life cover is relatively cheap because of the economies of scale offered to insurers providing the cover. The life cover may be basic and there may be the opportunity to provide employees with add on benefits.
A life insurance policy with guaranteed rates means the premium being offered will not change during the term of the policy.
Hazardous activities for life insurance applications include scuba diving, private aviation, sky diving and mountain climbing. If you participate in a hazardous activity you may not qualify for life insurance because the insurer does not want to take risk of insuring your life. It is important to check which activities are excluded and to make sure your application is completed with all the information required. Failure to disclose a hazardous activity as a hobby may mean your insurance policy becomes ineligible and it may not payout.
Net Worth Individual
A high net worth individual (HNWI) is a person with at least $1,000,000 of assets which include cash, bonds, shares but excludes real estate according to Cap Gemini in its World Wealth Report 2020. See also Very High Net Worth and Ultra High Net Worth.
A company that provides insurance coverage, which is also known as the insurer. Insurance policies are issued in the case of life insurers to individuals looking for life cover to protect their family or business from a financial loss.
The insurability of an individual is based upon the criteria set out by an insurance company for the person applying for life insurance. Insurability will include underwriters reviewing an individual’s medical records, application for cover and any supporting documentation.
An insurable interest is required when purchasing life insurance for oneself or when taking out a life policy on another person’s life. There must be the potential for financial loss if the person being insured dies. For example, if the main income earner of a family dies, it would cause the family hardship through financial loss of that income. If a key person in a business who was responsible for significant sales dies, this would qualify as a financial loss to the company. People not subject to financial loss do not have an insurable interest.
The physical document issued by an insurance company to the policy owner. The insurance policy is a written contract between the insurance company and the policy owner which includes the face amount, the premium cost and clauses
The individual is covered by an insurance policy. Also known as the Life Insured.
An irrevocable beneficiary is a beneficiary who cannot be changed without the written consent of that person. Any changes to the policy can only be made with the owners signature and the beneficiary.
The issue date is the date on which an insurance policy is issued. The issue date may be the effective date of the policy.
An insurer is the same as the insurance company which is the company providing the insurance.
Jumbo Universal Life Insurance
Universal life insurance is also known as jumbo life insurance. It is so-called because of the large insured amounts of life cover available. Jumbo universal life insurance combines a high death benefit with an investment component that offers a cash surrender value.
This type of life policy is permanent life insurance and is favoured by high net worth individuals looking to protect and grow their wealth. See also Universal Life Insurance and Different Types of Universal Life Insurance.
Key Person Insurance
A life insurance policy can be bought by a business to protect itself financially from the loss of key people in the company. The policy is bought on the life of a key person, or people, in the business whose loss would leave a significant financial strain due to their importance. For example, a chief executive officer, a key salesperson or somebody with critical product knowledge. The policy proceeds are used to offset the financial loss experienced by the company due to the person's death.
A key-person insurance policy can be owned by the company. The business is typically the beneficiary of the life insurance payout if it loses the key company member whose life is been insured.
Cross Option Agreement
Another type of key person insurance arrangement is where a business owner buys a life insurance policy on their own life and names another co-owner of the business as the beneficiary of the policy. This arrangement enables the co-owners to purchase each other’s share of the business if the other dies. A cross option agreement is typically put in place which is a legal agreement setting out the terms and conditions on the share sale in this type of arrangement.
If a life insurance policy lapses, it means the life cover has ended due to the non-payment of the premium.
Length of Coverage
The length of time covered by a life insurance policy. The length of coverage is important when choosing a term life insurance policy. Selecting a time period that will cover the right timeframe is important. For example, if you are taking out a 20-year loan to buy real estate, you may consider matching the time frame of that loan with a 20-year term life insurance policy to match the proposed period you have the debt for.
A level premium remains the same throughout the time period stated in the insurance policy contract.
Level Term Insurance
A type of term life insurance policy where the life cover amount (face value) remains the same throughout the period specified in the insurance policy.
The average number of years that a person is expected to live.
The life insurance cover an insurance company is prepared to offer an individual. The insurer will issue a life insurance policy that states the death benefit payable when the life insured dies.
Life Insurance Trust
A life insurance trust is a type of trust used to buy and hold a life insurance policy. The trust is named as the beneficiary. The payout from the policy is distributed in line with the terms set out in the trust.
A lump sum payment is made to the beneficiaries of a life insurance policy.
The life insured is the person whose life is being insured. If the life insured dies, the death benefit will be paid out to the beneficiaries.
Life expectancy is the age at which a person is expected to live. Life expectancy is calculated by an actuary and is based on the statistical averages of a population. This calculation helps an insurer decide how much it will charge to insure an individual’s life, before taking into consideration other factors like medical history and lifestyle factors.
A material misrepresentation is a statement of fact, that is made in a life insured’s application that is not true or incorrect. If a material misrepresentation is found to have been made, it will invalidate the life insurance policy. If the fact(s) stated had been correctly detailed, the life insurance company may have chosen to refuse the applicant life cover or may have requested a higher premium to be paid for the policy.
A medical exam is undertaken by a doctor in order to provide an accurate and current picture of the health of the individual applying for life insurance. Medical examinations form part of the underwriting procedure for a life insurance policy.
Multi-Pay Premium Finance
Some insurance companies allow the life insured, or policy owner, to spread their life insurance premiums over a period of time, for example, 2 to 30 years. Spreading the cost of life insurance premiums can be helpful for cash flow. Multi paying for a life insurance policy will cost more because the life insurer is not receiving all the premium upfront.
Permanent Life Insurance
Permanent life insurance offers life insurance cover for the whole of the life insured life, unlike term insurance which is for a specific and defined period of time. Some permanent life insurance policies have a cash-in value available to the policyholder if the policy is cancelled.
The premiums of some types of permanent life insurance solutions like universal life insurance are invested either in an insurance company’s own funds or in a selection of funds chosen by the policyholder and accepted by the insurance company. The investment returns can lead to the cash value of a policy growing, or falling, during the life of the policy.
The cash value can be accessed either through a loan or as a partial or full withdrawal. Any withdrawal from the policy will affect the ability of the policy to pay out the full death benefit.
The policy is the signed and dated insurance contract document issued by an insurance company to the policy owner. The policy owner may be different to the life insured.
The policy anniversary is the anniversary date of when the policy was issued.
The policy date is the day, month and year upon which the insurance policy becomes effective.
A policy fee is charged by some insurers to cover expenses like policy administration incurred by the insurance company. The policy fee is usually included in the premium.
A policy loan is a loan made by the insurance company to the policy owner. The loan is secured by the policy's cash value.
The policy owner can be an individual, company or trust which owns a life insurance policy. The owner of the life policy may, or may not, be the same as the life insured individual. The owner has all the contractual rights of the policy. A common scenario in which a policy owner is different to the life insured is when a policy is being premium financed. In this scenario, a trust or company will buy a policy on the life of an individual. The trust or company will be the owner of the policy and it will take out finance to fund the premium from a bank or specialist premium finance company.
Policy proceeds are the amounts paid out upon the death of the life insured, the policy surrender value or the value of the policy at maturity.
A premium is a payment, or one of the several payments, made by the life insured or the policy to buy an insurance policy. Premiums for a life insurance policy are usually made yearly, half-yearly, quarterly or monthly.
The person(s) designated by the policy owner to which the proceeds of a life insurance policy will be paid upon the death of the insured.
The amount payable under the terms of a life insurance policy upon the insured's death or upon the maturity of an endowment.
The person named in a life insurance application is the person whose life is to be covered by the insurance.
A life insurance quote is the estimated cost, or premium, that a life insurance applicant will pay for their life insurance policy. A life insurance quote is based on a range of factors including the type of life policy being applied for, age, gender, health, smoking status and the country the life to be insured lives in.
All life insurance quotes are illustrated estimates of the cost and the final rate will be decided by an insurance company’s underwriter.
The definition of QNUPS is a Qualifying Non-UK Pension Scheme. QNUPS is an offshore pension plan used for retirement planning. QNUPS are unapproved non-UK pension schemes typically used by high net worth individuals as part of retirement and estate planning.
A rating is the category given to a life insurance applicant by an insurer and represents the risk that individual is to the insurer.
The categories are based upon health status, smoking status and other factors including participation in hazardous occupations.
Ratings typically include a standard rating, preferred rating, super-preferred rating to rated and non-offered.
If a life insurance rating is applied, the basis for the additional cost compared to a standard rating is because the individual’s life is classified as a greater than normal risk for the insurance company.
Reinstating a policy that has lapsed can be achieved by paying all the outstanding premiums with any interest due. Evidence of insurability will also usually be required from the life to be insured.
Revocable Beneficiary: A type of beneficiary designation that can be changed without the beneficiary's consent.
A rider is an endorsement made to a life insurance policy that amends clauses and provisions of the policy, including or excluding coverage.
Life Insurers use a range of risk classifications to determine the amount of premium they will charge a client to insure their lives. Life insurance risk classification is stated in two different ways:
A non-smoker risk classification carries the lowest premiums compared to a smoker risk class. Typical risk classification ratings are:
Super Preferred and Preferred Rating Classes: the best premium rate classes available on life insurance policies for applicants that are determined to be in better than average health.
Standard Plus Ratings Class: better than average rating class for life insurance applicants who are higher than average health.
Standard Rating Class: the standard rating class for an individual who has average health when applying for life insurance according to an insurance company's underwriting guidelines.
Second to Die Life Insurance
A type of life insurance that insures two people’s lives, typically a husband and wife. This type of life insurance policy is also known as a joint life second death policy. The death benefit of a second to die policy is payable upon the death of the last or second individual to die.
A life insurance settlement is the receipt of a payout from a life insurance policy. This payment is usually made as a one-off lump sum.
Single Premium Life Insurance
A single premium life insurance policy requires only one premium to be paid to start the policy. An example of a single premium life insurance policy is universal life insurance.
A suicide clause is typically a two-year time period at the start of a life insurance contract in which an insurer will not pay a death benefit under the policy due to death by suicide. However, the original premium minus any policy loans will be returned to the policy owner.
Surrendering a life insurance policy will cause the life cover to stop and any cash surrender value will be paid to the policy owner.
Term Life Insurance
Term life insurance is a basic type of life insurance policy that offers a cost-effective way of providing life cover for a fixed period of time, typically between 1 and 25 years. A term life insurance policy will only pay out if the life assured dies during the fixed term period of the policy. After the fixed term period ends, the term life cover also ends.
Decreasing Term Insurance
Decreasing term life insurance is another basic form of life insurance and like term insurance, it can offer a cheap and effective way of providing life cover for a fixed period of time. The major difference between term life insurance and decreasing term life insurance is that term cover offers the same level of cover throughout the life of the policy, whereas decreasing term cover will decrease the level of cover an individual receives throughout its term. For example, decreasing term insurance policies are used to cover gifts that may be Potentially Exempt Transfers (PETs) under United Kingdom tax law. Gifts made under this rule are subject to a decreasing level of taxation over a time period of 7 years, thereby making decreasing term insurance an option to cover this need.
Ultra-High Net Worth Individual
An ultra-high net worth individual (UHNWI) is a person with at least $30,000,000 of assets which include cash, bonds, shares but excludes real estate according to Cap Gemini in its World Wealth Report 2020. See also High Net Worth and Very High Net Worth
An underwriter is an individual who decides upon the risk classification of a life insurance applicant which decides the premium they will pay to be insured. Underwriters normally work within life insurance companies to help determine underwriting risks for an insurer.
Underwriting is the process of evaluating a life insurance application for life cover. Underwriting determines the risk classification of an applicant. A rating class is given for that person, or the insurer declines to offer cover to the applicant.
An uninsurable risk describes a life insurance applicant who is not acceptable for life insurance. The life insurance company could decide that there are risks that relate to the applicant's current health, medical history, occupation or hobby’s for example.
Universal Life Insurance
The definition of universal life insurance is a type of permanent life insurance that combines whole of life insurance with an investment component. A portion of the premium paid for the policy goes towards buying life cover with the remaining portion of the premium being invested. The type of investment made depends upon which type of universal life insurance is being applied for.
Different Types of Universal Life Insurance
Traditional Universal Life
Traditional universal life insurance policies combine whole of life insurance with an investment component decided by the life insurance company. Many life insurers offer policy owners minimum guaranteed returns on their policies when the insurer controls the investment strategy.
Variable Universal Life
Variable universal life insurance policies combine whole of life insurance with an investment portfolio. Like other universal life policies, part of the premium paid is used to buy life insurance cover that provides the policy's death benefit, with the remaining premium invested into a portfolio that can be determined by the policyholder.
When investment returns are good, a variable universal life policy can be attractive as the cash value portion of the policy rises in line with the portfolio's investment performance. However, in times of significant market declines, these policies may require further premiums to be paid in order to maintain the policy cash value which pays for the life insurance element of the policy. These types of policies though are still bought today but have become less attractive with the introduction of indexed universal life insurance.
Index Universal Life
Indexed universal life insurance policies use some of the premium to pay for the life insurance cover element of the contract, with the remaining premium participating in the stock market.
Policyholders are typically invested in a mix of indices selected by the life insurance company. For example, the S&P 500 and the Hang Seng indices are popular choices for insurers to use. The combined investment returns achieved by each index are used to credit the cash value of the policy.
Some insurers offer policyholders a minimum guaranteed return each year, which makes indexed universal life insurance an attractive alternative to variable universal life insurance policies.
Whole Life Insurance
Whole of life insurance is a type of permanent life insurance with a guaranteed death benefit. Premiums are either paid in a single lump sum upfront or yearly or monthly depending upon how the life insurance contract is set up.
The in-built guarantees of whole of life insurance mean it is typically the most expensive type of policy to buy. The premiums are higher to reflect the fact that the insurance company issuing the policy to the individual is carrying all the risk of an eventual payout.
Some permanent life policies have a cash surrender value, whilst others are designed to never have a cash value.
Whole Life cash value insurance has a guaranteed cash value that can grow. In addition, there are non-guaranteed reversionary bonuses that are declared every year. Finally, growth in the policy can also benefit from a terminal bonus which is a one-time non-guaranteed bonus paid upon surrender of the policy.
Very High Net Worth Individual
A very high net worth individual (VHNWI) is a person with at least $35000,000 of assets which include cash, bonds, shares but excludes real estate according to Cap Gemini in its World Wealth Report 2020. See also High Net Worth and Ultra High Net Worth
We hope our life insurance glossary of terms has been helpful. Now request a life insurance and premium finance quote for free or talk to a life insurance expert at Capital for Life.
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