Important terms in Life Insurance policy

Life insurance is an essential part of financial planning and provides a sense of security to the policyholder and their loved ones. Understanding the key terms and concepts related to life insurance can help in making an informed decision while choosing a policy. In this article, we will discuss some of the most important terms in life insurance policy.

Types of Life Insurance

1. Term Life Insurance
2. Whole Life Insurance
3. Universal Life Insurance
4. Variable Life Insurance

Term Life Insurance

• It provides coverage for a specific term, usually ranging from 10 to 30 years.
• It is the most affordable type of life insurance.
• The death benefit is payable only if the policyholder dies within the term of the policy.
• If the policyholder survives the term, the policy will expire without any value.

Whole Life Insurance

• It provides coverage for the policyholder’s entire life.
• It comes with a savings component known as cash value, which grows over time and can be borrowed against.
• The premium for whole life insurance is typically higher than term life insurance.
• The death benefit is payable whenever the policyholder dies.

Universal Life Insurance

• It is a type of flexible permanent life insurance that provides both death benefit protection and a savings component known as cash value.
• The premium and death benefit are adjustable, and the policyholder can change the coverage amount and premium payment as needed.
• The cash value component earns interest, and the policyholder can choose to invest the cash value into various investment options.

Variable Life Insurance

• It is a type of permanent life insurance that provides death benefit protection and a cash value component that is invested in separate accounts such as stocks, bonds, or mutual funds.
• The cash value and death benefit can fluctuate based on the performance of the investment options.
• The policyholder has the option to manage the investment portfolio, but there is also the risk of losing money if the investments perform poorly.

Here are few terms you should know before dealing with life insurance

Coverage Amount

• The coverage amount refers to the death benefit amount that the policyholder’s beneficiaries will receive if the policyholder dies while the policy is in force.
• The coverage amount is usually determined based on the policyholder’s income, debts, and financial obligations.
• The policyholder can choose to increase or decrease the coverage amount as their needs change over time.

Premium

• The premium is the amount the policyholder pays to the insurance company to maintain their life insurance coverage.
• The premium is usually paid on a monthly, quarterly, semi-annual, or annual basis.
• The premium amount can vary based on the policyholder’s age, health, coverage amount, and type of policy.

Policy Term

• The policy term refers to the length of time for which the life insurance coverage is in effect.
• For term life insurance, the policy term is fixed, usually ranging from 10 to 30 years.
• For permanent life insurance, the policy term is the policyholder’s entire life.

Death Benefit

• The death benefit is the amount of money that the policyholder’s beneficiaries will receive if the policyholder dies while the policy is in force.
• The death benefit is usually tax-free and can be used for any purpose, such as paying for funeral expenses, paying off debts, or providing for the policyholder’s family.

Cash Value

• The cash value is a savings component that is a part of permanent life insurance policies such as whole life, universal life, and variable life insurance.
• The cash value grows over time and can be borrowed against or used to pay premiums.
• The cash value is not guaranteed and can fluctuate based on the performance of the investments, in the case of variable life insurance.

Riders

• Riders are optional add-ons to a life insurance policy that provide additional coverage or benefits.
• Common riders include accidental death benefit, waiver of premium, and long-term care.
• Riders come at an additional cost and may not be available with all types of policies.

Exclusions

• Exclusions are events or circumstances that are not covered under the life insurance policy.
• Common exclusions include death by suicide, death due to criminal activities, and death resulting from a pre-existing medical condition.
• It is important to review the policy’s exclusions before purchasing life insurance.

Underwriting

• Underwriting is the process by which the insurance company assesses the policyholder’s risk and determines the premium and coverage amount.
• The underwriting process includes a review of the policyholder’s medical history, lifestyle, and financial information.
• The underwriting process can impact the policyholder’s premium and coverage amount, so it is important to provide accurate information.

Claims Process

• The claims process is the process by which the policyholder’s beneficiaries can receive the death benefit if the policyholder dies while the policy is in force.
• The claims process usually involves submitting a death certificate and proof of claim to the insurance company.
• The insurance company may also require additional information, such as an autopsy report or police report, to process the claim.

In conclusion, life insurance is an important part of financial planning, and understanding the key terms and concepts can help in making an informed decision. It is important to review the policy’s coverage amount, premium, policy term, death benefit, cash value, riders, exclusions, underwriting process, and claims process before purchasing a policy. An experienced insurance agent or financial advisor can provide additional guidance and help in choosing the best policy to meet your specific needs.