Life insurance is an excellent way to ensure your loved ones are taken care of. But within life insurance, there are terms that frequently appear. Knowing these terms will help you make an informed decision about which policy is right for you.
The death benefit is the amount that will be disbursed to your beneficiaries after your death.
The size of your policy refers to the death benefit. For example, when someone says they have a $100,000 policy, they’re talking about a policy with a death benefit of $100,000.
A beneficiary is a person you’ve selected to receive the death benefit. You can choose more than one beneficiary.
Beneficiaries are often loved ones, but they can also be charities or other organizations.
Life insurance riders are features you can attach to your policy for an extra fee. These can include accelerated death benefits (access the death benefit if you’re terminally ill), guaranteed issue (no need to show proof of insurability to obtain a policy), and waiver of premium (you won’t have to pay premiums if you lose the ability to earn income).
Insurability risk refers to the company’s risk of insuring you.
When a company insures you, they’re doing so with the expectation that you’ll pay enough in premiums so they can disburse the death benefit and remain profitable.
An insurability risk is someone who has a shorter life expectancy due to poor health or hazardous lifestyle choices, or is older and is closer to the end of his or her life expectancy. If the company insures an individual like this, they’re risking dispensing hundreds of thousands of dollars for little in return.
Being an insurability risk results in higher premiums in order to compensate for the shorter time you’ll be able to pay them.
This is one of the tools your insurer will use to assess insurability risk. Medical underwriting involves undergoing a medical exam and/or answering a medical questionnaire.
Applies to term life insurance. This is a policy that lasts only for 10-30 years. Your loved ones will not get the death benefit if you outlive your policy.
This is a policy that lasts a lifetime. Your loved ones will get the death benefit as long as you’ve maintained your premium payments.
Cash value is a feature of certain whole life policies. The insurance company takes a portion of your premiums and places them into a special savings account. You will have access to these savings after a certain period of time, and you can use the funds for any purpose – including paying premiums.
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